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GLOBAL TAX WEEKLY ISSUE 40 | AUGUST 15, 2013 a closer look

SUBJECTS TRANSFER PRICING INTELLECTUAL PROPERTY VAT, GST AND SALES TAX CORPORATE TAXATION INDIVIDUAL TAXATION REAL ESTATE AND PROPERTY TAXES INTERNATIONAL FISCAL GOVERNANCE BUDGETS COMPLIANCE OFFSHORE SECTORS MANUFACTURING RETAIL/WHOLESALE INSURANCE BANKS/FINANCIAL INSTITUTIONS RESTAURANTS/FOOD SERVICE CONSTRUCTION AEROSPACE ENERGY AUTOMOTIVE MINING AND MINERALS ENTERTAINMENT AND MEDIA OIL AND GAS

COUNTRIES AND REGIONS EUROPE AUSTRIA BELGIUM BULGARIA CYPRUS CZECH REPUBLIC DENMARK ESTONIA FINLAND FRANCE GERMANY GREECE HUNGARY IRELAND ITALY LATVIA LITHUANIA LUXEMBOURG MALTA NETHERLANDS POLAND PORTUGAL ROMANIA SLOVAKIA SLOVENIA SPAIN SWEDEN SWITZERLAND UNITED KINGDOM EMERGING MARKETS ARGENTINA BRAZIL CHILE CHINA INDIA ISRAEL MEXICO RUSSIA SOUTH AFRICA SOUTH KOREA TAIWAN VIETNAM CENTRAL AND EASTERN EUROPE ARMENIA AZERBAIJAN BOSNIA CROATIA FAROE ISLANDS GEORGIA KAZAKHSTAN MONTENEGRO NORWAY SERBIA TURKEY UKRAINE UZBEKISTAN ASIA-PAC AUSTRALIA BANGLADESH BRUNEI HONG KONG INDONESIA JAPAN MALAYSIA NEW ZEALAND PAKISTAN PHILIPPINES SINGAPORE THAILAND AMERICAS BOLIVIA CANADA COLOMBIA COSTA RICA ECUADOR EL SALVADOR GUATEMALA PANAMA PERU PUERTO RICO URUGUAY UNITED STATES VENEZUELA MIDDLE EAST ALGERIA BAHRAIN BOTSWANA DUBAI EGYPT ETHIOPIA EQUATORIAL GUINEA IRAQ KUWAIT MOROCCO NIGERIA OMAN QATAR SAUDI ARABIA TUNISIA LOW-TAX JURISDICTIONS ANDORRA ARUBA BAHAMAS BARBADOS BELIZE BERMUDA BRITISH VIRGIN ISLANDS CAYMAN ISLANDS COOK ISLANDS CURACAO GIBRALTAR GUERNSEY ISLE OF MAN JERSEY LABUAN LIECHTENSTEIN MAURITIUS MONACO TURKS AND CAICOS ISLANDS VANUATU GLOBAL TAX WEEKLY a closer look

Global Tax Weekly – A Closer Look

Using the unrivalled worldwide multi-lingual research Alongside the news analyses are a wealth capabilities of leading law and tax publisher Wolters of feature articles each week covering key Kluwer and its new acquisition BSI (The Lowtax current topics in depth, written by a team of Network), CCH publishes Global Tax Weekly –– A senior international tax and legal experts and Closer Look (GTW) as an indispensable up-to-the- supplemented by commentative topical news minute guide to today's shifting tax landscape for all analyses. Supporting features include a round-up tax practitioners and international ﬁ nance executives. of tax treaty developments, a report on important new judgments, a calendar of upcoming tax Topicality, thoroughness and relevance are our conferences, and “The Jester's Column,” a light- watchwords: BSI's network of expert local researchers hearted but merciless commentary on the week's covers 130 countries and provides input to a US/UK tax events. team of editors outputting 100 tax news stories a week. GTW highlights 20 of these stories each week Read Global Tax Weekly –– A Closer Look in under a series of useful headings, including industry printable PDF form, on your iPad or online through sectors (e.g. manufacturing), subjects (e.g. transfer Intelliconnect, and you'll be a step ahead of your pricing) and regions (e.g. asia-paciﬁ c). world on Monday morning! GLOBAL TAX WEEKLY ISSUE 40 | AUGUST 15, 2013 a closer look CONTENTS

FEATURED ARTICLES Dutch Flow-Th rough Entities In Th e Finance Act 2013 Introduces Th e UK’s Netherlands: An Economic Impact Analysis New Statutory Residence Test by Prof. dr. Gerard T.K. Meussen, Professor of tax law by David Klass and Janice Houghton, Gide Loyrette at the Radboud University Nijmegen, the Netherlands Nouel LLP 32 and technical advisor to BDO Tax Consultants, Tilburg, the Netherlands 5 OECD Project On Intangibles: Revised Discussion Draft Released Th e Rising Tide Of Tax In France by PricewaterhouseCoopers 36 by Stuart Gray, Senior Editor, Global Tax Weekly 9 Topical News Brieﬁ ng: Th e Double-Edged Tax And Th e Treasury Center: Sword Of Park’s Tax Policy Cash Management And Cash Pooling by the Global Tax Weekly Editorial Team 42 by Mark Minihane, Associate Partner, International Tax Services, Ernst & Young LLP, Birmingham, UK 26 Tax News From Th e Middle East by KPMG Partners In Th e Region 43 Topical News Brieﬁ ng: Bolting Th e Door To A Carbon Tax Australian Elections: Assessing Th e Parties’ by the Global Tax Weekly Editorial Team 31 Tax Plans by Stuart Gray, Senior Editor, Global Tax Weekly 47

NEWS ROUND-UP

Country Focus: South Korea 55 Off shore 59

South Korea To Finalize Property Tax Changes Off shore Company Formations Have Slowed South Korea Introduces 2013 Tax Bill Gibraltar Border Tax Row Escalates South Korea Government’s Tax Policies Under Fire Hong Kong’s Advantages Promoted In New Zealand

Bermuda, US Treasury Complete FATCA Negotiations Jersey To Submit To New Regulations On EU Savings Tax Country Focus: United States 63 Regional Focus: Africa 72

House Passes Anti-US Carbon Tax Amendment South African Business Warns Over New Carbon Tax

US Study Criticizes Increased CGT Rates US Discusses Future African Trade Initiatives

IRS Disputes Tyco Debt Interest Deductions Amended Customs Bills Submitted To SA Parliament

US Expats Giving Up Passports To Avoid Tax Obligations Morocco Confi rms Large Farms To Lose Tax Exemption

US Treasury Releases 2013-14 Tax Guidance Plan

TAX TREATY ROUND-UP 76 SMEs 69 CONFERENCE CALENDAR 78 IMF Addresses Japanese Consumption Tax Dilemma IN THE COURTS 96 Bulgaria To Launch Cash Accounting Option THE JESTER'S COLUMN 101 US Small Businesses Pay Highest Tax Rates Th e unacceptable face of tax journalism

For article guidelines and submissions, contact [email protected] FEATURED ARTICLES ISSUE 40 | AUGUST 15, 2013

Dutch Flow-Through Entities In The Netherlands: An Economic Impact Analysis by Prof. Dr. Gerard T.K. Meussen, Professor of tax law at the Radboud University Nijmegen, the Netherlands and technical advisor to BDO Tax Consultants, Tilburg, the Netherlands

Commissioned by Holland Financial Center The survey expresses that the Netherlands is a (HFC), the Amsterdam based SEO research tax-wise attractive location for the establish- group researching the economic value of tax ment of flow-through entities. Not so much structures of foreign companies in the Nether- because of the applicable corporate income tax lands.1 Th e Holland Financial Center foundation rate (which is reasonable in respect of global tax is a public-private initiative set up by organiza- rates) but because of the absence of source taxa- tions from throughout the fi nancial sector, the tion on interest and royalty payments and the government and regulators. Th ey include banks, vast (98) bilateral treaty network. It should be insurers, trading fi rms, pension funds, asset man- kept in mind that the absence of source taxa- agers, audit fi rms, law fi rms and the government. tion in the Netherlands is not something new, As a joint venture, the purpose of the Holland but that it already exists for many decades. Fur- Financial Center is to strengthen the fi nancial thermore there is a genuine willingness of the sector in the Netherlands . Netherlands tax administration to issue tax rulings in order to give entities established in the Th e study took place after questions from the Netherlands legal certainty about their present House of Representatives to Secretary of Finance or future tax position. Frans Weekers and a series of articles called "Tax Route Netherlands" in Het Financieele Dagblad According to the survey, in the year 2010 there in the years 2011 and 2012. Th e study includes were approximately 12,000 special fi nancial insti- the special fi nancial institutions (also referred to tutions (entities) established in the Netherlands. as letter box companies or SPVs2 ) and non-bank Th e dividend, interest and royalty fl ows in 2010 fi nancing (known as shadow banking). Th e term amounted to a total of around EUR153bn (in- letterbox is used in this research for companies that coming) and EUR125bn (outgoing). Dividends are, for tax reasons, without signifi cant commer- are here the dominant power, with 70 percent and cial or operational presence in the Netherlands. 60 percent of the total, respectively.

5 Of the 12,000 entities in the Netherlands there are on the other hand this also makes a substantial con- more than 5,000 belonging to a cluster – compa- tribution to the Netherlands economy. nies that are part of the same group. Taking these clusters into consideration, according to the re- However, the study provides no evidence for the search about 8,500 multinationals have established assertion of the Netherlands State Secretary of Fi- their fi nances through the Netherlands by means of nance Weekers, that fi nancial SPVs of foreign cor- one or more SPVs. Special purpose entities contrib- porations settled in the Netherlands eventually ute according to the survey an estimated amount grow into a headquarters or distribution center. of EUR3 to EUR3.4bn a year to the Netherlands economy in the form of taxes, labor and services Politically sensitive is the conclusion of the re- purchased as business services. Of this amount, ac- search group that developing countries, as a re- cording to the researchers, EUR1.2bn relates to the sult of tax treaties with the Netherlands, based on payment of corporation tax. In addition, SPVs, as a rough estimate in the year 2011, are forgoing part of that EUR3 to EUR3.4 bn per year in 2011, approximately EUR145m in tax revenues every according to the researchers paid EUR1bn dividend year. Here according to researchers various nu- withholding tax. Th e latter, however is questioned ances have to be taken into consideration, such as by the tax world as SPVs are set to up to avoid divi- the fact that developing countries can also benefi t dend withholding tax. from tax treaties. It is fairly obvious that politicians will ask for more research on the topic of Th us SPVs are providing (directly and indirectly) developing countries. A lot of politicians at least according to the researchers, employment of around fi nd it unethical to use bilateral tax treaties in a 8,800 to 13,000 jobs (FTEs). way that they deprive developing countries from tax revenues that they so urgently need. Th e researchers clearly state that they have solely engaged in publishing the mere facts concerning After the summer break, the Netherlands State the economic impact of fl ow-through entities in Secretary of Finance Weekers will come with a the Netherlands. Th e analysis in the report is not comment and reasoned opinion on the report and of any juridical or moral nature. Th is should con- he will present it to the Netherlands parliament. tribute to a more objective debate in Netherlands A discussion will then take place on the future of politics and society concerning the future of these these kind of entities. It is not diffi cult to imagine international tax structures. that more severe substance requirements will be proposed by left wing political parties. And the Th e above shows that there are huge fi nancial fl ows state secretary will tackle that by putting emphasis going through the Netherlands for tax reasons, but on the economic factor of these entities as well as

6 the aspect of tax competition between countries. and transportation of physical goods and not on the Why should the Netherlands voluntarily give up rendering of digitalized services (digital economy). these structures if they will only be taken over by Th is also emerges from the recent OECD initiative other countries? "Action Plan on Base Erosion and Profi t Shifting" 4 in which the OECD urges its members to address Another aspect is the fact whether the Netherlands the tax challenges of the digital economy. One of tax administration should cooperate in concluding the actions from the action plan, Action 8, involves a tax ruling with a Netherlands fl ow through entity intangibles. Th ere it is said that members should en- whose only means and purpose is to save foreign sure that profi ts associated with the transfer and use corporate and withholding tax. Should this not be of intangibles are appropriately allocated in accor- dealt with as abuse of tax law in which situation no dance with (rather than divorced from) value cre- legal certainty should be provided?3 Abuse of tax ation. And furthermore that transfer pricing rules law in that respect should be seen from an interna- or special measures should be developed for transfer tional perspective and not purely from a Nether- of hard-to-value intangibles. But we all know that lands perspective. Vleggeert argues that this matter any major changes in international tax policy may should be evaluated only on the basis of substance take many, many years while the OECD can only requirements. If these requirements are met but the recommend but not enforce. Th is leads to the con- whole structure is only tax driven, should the Neth- clusion that in a world that is changing so rapidly, erlands tax administration than deny the issuing of international tax policy cannot keep pace with the a tax ruling? With these tax structures, the Nether- digital economy. Th e digital economy leads to a lands may gain tax revenues, but this is to the detri- world without boundaries, but the tax jurisdiction ment of foreign tax jurisdictions. of individual countries is still based on the territori- ality principle which is in contradiction to that. In essence of course the real problem in my view are not the fl ow-through entities. Th e real problem is To be continued . . . the mere fact that the "at-arms-length" principle in a digitalized global world is not a feasible concept Th e author can be contacted at: g.meussen@jur. any more. How are intellectual property rights to ru.nl or [email protected] be valued as well is license fees of these rights between companies in various tax jurisdictions? Mul- E NDNOTES tinational companies in this respect will always have 1 SEO economic research, Uit de schaduw van het far more knowledge of these matters than any gov- bankwezen, Feiten en cijfers over bijzondere ﬁ nanciële ernment in the world. Th e at-arms-length principle instellingen en het schaduwbankwezen, June 2013, dates from an era based primarily on the transfer SEO-report nr. 2013-31, ISBN 978-90-6733-702-1.

7 2 Special Purpose Vehicles or Entities. 4 OECD (2013), Action Plan on Base Erosion and 3 Compare: J.Vleggeert, Stop met afgeven tax rulings Profit Shifting, OECD Publishing, http://dx.doi. aan brievenbusmaatschappijen, Weekblad ﬁ scaal recht org/10.1787/978264202719-en 2013/916.

8 FEATURED ARTICLES ISSUE 40 | AUGUST 15, 2013

The Rising Tide Of Tax In France by Stuart Gray, Senior Editor, Global Tax Weekly

Th e International Monetary Fund (IMF) is rou- tinely heard telling governments to wind down fi s- cal stimulus measures and accelerate the pace of fi s- cal retrenchment, usually through a mix of tax base broadening, higher taxes and spending cuts. How- ever, it is rare to hear it admonish a government for will drop to below 3 percent of GDP this year be- taxing too much, which is why its latest Article IV fore falling to less than 1 percent in 2018. consultation1 with France stands out among its normal conveyor belt of economic releases. Th is article However, if any credit should be given in the belt- looks at revenue measures announced so far this tightening stakes, it should go to France's taxpayers, year, potential new taxes in the pipeline for future who have contributed by far the most to the aus- years, eff orts by the Government to improve the terity drive, rather than the Government, which, French business environment in addition to con- if headline fi gures are to be believed, has hardly cerns raised by the IMF and others about the nega- tightened its belt at all. As was noted by the IMF, tive economic consequences of current tax policy. about 90 percent of the fi scal adjustment so far has been realized through revenue measures, and ac- Introduction cording to the French national statistics offi ce In- Like other eurozone governments, France has had see, compulsory levies in France reached a record to seriously tighten its belt since the crisis began in level of 45 percent of GDP in 2012, compared to order to tackle a dangerously high budget defi cit 43.7 percent in 2011, and this is a burden that is and rising public debt. Indeed, there was a point no going to continue rising this year and next. Insee so long ago when economists feared France would also revealed that in 2012, taxes on income and on be dragged into the debt maelstrom that has en- wealth paid by households in France increased by gulfed Greece, Ireland, Italy and Spain. Th e coun- 10.2 percent, notably due to the implementation try appears to have avoided the crises which have of a raft of new tax measures, adopted both before struck these other countries: fi nancial stability risks and after the elections. appear to have abated, for now at least, and its budget defi cit has fallen from 6.3 percent of gross do- Whenever President Hollande is mentioned in the mestic product (GDP) in 2010 to just under four media, more often than not it seems in connection percent last year, with the IMF predicting that it with new or higher taxes. However, we learn from

9 the Insee report that the fi scal measures adopted grabbed most of the headlines. But barely a week at the back end of former French President Nico- seems to go by without a report or announcement las Sarkozy's administration, within the framework that existing taxes will be increased, or new taxes of the 2012 State and Social Security Budgets, created, and here we summarize some of the key amounted to around EUR15bn (USD19.3bn), ac- developments since the turn of the year. counting for two-thirds of the tax rises in 2012, while the tax initiatives waved through under Hol- Short-Term Contracts lande totaled in the region of EUR7bn (summer January saw France's social partners fi nally unite on 2012 Collective Budget). plans to reform the country's labor market, after a compromise was reached at the eleventh hour ensur- Th e key tax rises adopted under Sarkozy included ing increased taxation of short-term contracts to steer the creation of a seven percent intermediary rate of employers towards more permanent agreements. value-added tax (VAT), the non-indexation of the country's individual income tax scale, changes to Providing greater security for employees, follow- the taxation of real estate capital gains, and the 1.2 ing lengthy and diffi cult negotiations, employer percent rise in the rate of social levies imposed on groups and unions overcame a key hurdle, consent- income from capital. ing to plans to increase employers' unemployment insurance contributions for short-term contracts Under Hollande, an exceptional wealth tax contri- (CDDs). Consequently, contributions on short- bution was imposed, the tax exemption accorded term contracts of less than one month are to rise by for overtime hours was abolished, the prepayment 3 percent, contributions on CDDs of between one of the exceptional corporation tax contribution was and three months are to increase by 1.5 percent, implemented, and a new increase in the social lev- and on seasonal contracts used for example in the ies on capital was applied. hotel industry by 0.5 percent.

As the following section illustrates, however, there Under the plans, to boost the recruitment of young are plenty more revenue measures to come from the people in France, employers taking on young staff Hollande Government this year and in future years. on long-term contracts will be exempt from unemployment insurance contributions for a period of Tax Developments in 2013 three months, rising to four months for small busi- It is President Hollande's determination to impose nesses with fewer than 50 employees. a 75 percent rate of income tax on the highest-paid, an ambition that was thwarted, if only temporar- Employer groups agreed to provide greater protec- ily, by the Constitutional Court last year, that has tion to employees by creating the conditions for

10 broader access to complementary health care and National Tax Evasion Plan by introducing new rights. In February, Prime Minister Jean-Marc Ayrault approved a national plan aimed at coordinating Dwelling Tax Reform eff orts to combat tax fraud and tax evasion in January also saw reports emerge of the Govern- France in 2013. ment's plans to include household income in the calculations of dwelling tax ( la taxe d'habitation ) Th e moves announced at a gathering of the na- from 2014. tional committee responsible for combating fraud in France (CNLF) include plans to monitor the ef- Dwelling tax is currently calculated according to fi ciency of the implementation of signed bilateral the cadastral rental value of a property and using tax agreements and to further limit cash payments a tax rate decided by individual local authorities in for both residents and non-residents. France. It is argued that introducing household income into the base of the tax would ensure that the Th e French Government intends to ensure more tax is fairer; under the current system, two house- eff ective implementation of bilateral tax agree- holds living side by side and on very diff erent in- ments, namely by assessing the eff ectiveness of the comes are subject to the same amount of tax. exchange of fi scal information between the relevant foreign and domestic tax authorities. Th is is to con- Th e proposals would primarily target the middle stitute a key objective for France at EU, OECD class in France as well as the country's wealthi- and G20 level. est. Individuals on low and modest incomes are already able to benefi t from a tax exemption or Th e existence of signed bilateral tax treaties togeth- from a tax reduction. er with the eff ectiveness of their implementation will be the two criteria taken into account when However, given the complexities of the task and establishing the next so-called "black list" of states in view of the fact that previous governments have and territories deemed to be non-cooperative in tax tried and failed to reform the system, notably by matters (ETNC), as provided for in the country's attempting to overhaul and update the cadastral general tax code (article 238-0 A). rental values dating from 1970 serving as the basis of the tax, the government does not seem in any Th e Government aims to ensure that a decree and rush to push through its plans. It is suggested that legislative measures are adopted by the end of 2013 the government intends to consider the idea in full providing for a reduction in the threshold for cash following the forthcoming municipal elections in payments from EUR3,000 (USD4,00) currently March 2014. to EUR1,000 per purchase for residents and from

11 EUR15,000 to EUR10,000 per purchase for non- of a tax levied at source on tobacco manufacturers, residents. Th e Government highlights the fact that the senators said. similar measures have been successfully implemented in both Italy and in Spain in the last few years. Th e senators suggested that a tax of 0.05 cent per cigarette, or 1 cent per packet of 20 cigarettes, be Finally, the Government plans to control transfer imposed annually on manufacturers and importers pricing better and to refl ect on new methods of on the basis of volumes sold. Th e tax would be lev- corporate reporting to reduce the cost of tax audits ied until the problem is fi nally resolved, the sena- and to improve fi scal predictability. tors stressed, underlining the fact that it would be the responsibility of tobacco manufacturers to pro- Environmental Tax On Cigarette Stubs pose alternative scientifi cally proven solutions. In February, French senators submitted a legislative proposal advocating the introduction of an envi- Under the proposal, a third of the revenue from the ronmental tax imposed on cigarette butts, payable tax would fl ow to local authorities to fi nance envi- by tobacco manufacturers. ronmental operations.

Justifying their proposal, the senators explained Digital Tax that 53 billion cigarettes are sold through offi cial Also in February, French Digital Economy Minister channels each year in France and a further 15 to 18 Fleur Pellerin announced her intention to include billion cigarettes sold abroad are subsequently con- plans for an Internet tax in the country's 2014 budget. sumed in France. Potentially, 70 billion cigarette butts are disposed of in the environment each year, Although her plans are vague, it is Pellerin's inten- the senators argued. tion to be able "to integrate something" into next year's fi nance law. Alluding to the fact that environmental associations have for a long time been calling for the issue to be Last year, President of the French Senate fi nance addressed, the senators insisted that pressure from committee Philippe Marini submitted a legislative local authorities in France is now also mounting, proposal advocating the introduction of a tax on particularly as a result of the rising costs linked to online advertising. Dismissing the idea at the time, the new source of pollution. Digital Economy Minister Pellerin maintained that the idea was simply not "ripe" at this stage. Given the principle of "polluter pays," it therefore seems appropriate that a tax is introduced to fi - However, on January 18, 2013, the French Finance nance eff orts to deal with the problem, in the form Ministry unveiled details of a report on taxation of the

12 digital economy, submitted by state councilor Pierre increase individual income and could therefore be Collin and Government auditor Nicolas Colin. taxed "in some way."

Commissioned in July last year, the report "off ers a According to Migaud, subjecting pension increases detailed and striking vision" of the rise in the digi- accorded to families with three children could serve tal economy and the importance of "the exploita- to yield around EUR800m (USD1bn) for the state. tion of personal data" in this growing sector. Th e report exposes the problem of profi t relocation or Th e Government is reportedly considering the shifting by companies, warning that this phenom- idea of either taxing family allowances or reduc- enon will only increase if nothing is done to tax ing the benefi t by EUR1bn next year and by a fur- their activity in France. ther EUR1.5bn in 2015, namely by capping or by means testing. Th e report called for a new tax to be introduced as a matter of urgency, based on the amount of personal Heavy Goods Vehicle Tax information collected by Internet companies such Following a planned national trial period, it was an- as Google, which is used to direct personalized ad- nounced in March that France's heavy goods vehicle vertising and other services to users. (HGV) eco-tax is to enter into force across France on October 1, 2013, much later than initially intended. At the time, the Government made clear that the idea of a national tax based on the use of personal Th e HGV eco-tax ensures that users pay for the use data is to be explored in detail in parallel with other of the country's non-concessionary roads and mo- proposals that have already been put forward aimed torways, generating revenues to fi nance vital trans- at resolving the issue, including notably the idea of port infrastructure. Th e levy also aims to facilitate taxing electronic trade. the required "ecological shift" in the long term, by encouraging a change in behavior and in the mode Family Allowance Tax of transport used to carry goods, to favor more en- President of the French Court of Auditors Didier vironmentally friendly forms of transport, notably Migaud put forward the idea in February of taxing rail and water. family allowances and retirement pensions as one means of increasing state revenues. Both foreign and French HGVs will be required to pay per kilometer to use the 15,000km road net- Th e idea of subjecting family benefi ts and family al- work which will be covered by the tax. Vehicles will lowances to taxation is one that could be put on the be fi tted with electronic devices operating a system table, Migaud said, pointing out that such benefi ts of satellite location.

13 Th e Government anticipates annual revenues from Th e revised super tax is to be provided for within the eco-tax of around EUR1bn (USD1.3bn). the framework of the 2014 budget.

Revamped Super Tax Unveiled Anti-Tax Evasion Bill Determined to save face and to regain popularity, Th e French Government presented a bill to the French President François Hollande announced in country's Council of Ministers in April designed to March that businesses in France and not individu- strengthen the fi ght against tax evasion and fi nan- als will be subject to the Government's planned 75 cial crime. According to the French Finance Min- percent super tax levied on top income earners. istry, the text completes the set of anti-tax evasion measures provided for in the 2012 supplementary During an interview with France 2, Hollande infi nance laws. sisted that the measure is not designed "to punish" companies, but merely to ensure that corporations Th e bill establishes a "tax police" to combat tax assume responsibility. Companies will therefore evasion, and creates an "aggravating circumstance" be subject to the 75 percent tax for remuneration for the most serious types of tax fraud, notably tax paid out to top executives in excess of EUR1m evasion committed by an organized group. To deal (USD1.28m). Th e charge is to include all taxes and with such cases, investigators will have recourse to to apply for a period of two years. special investigative techniques, including surveil- lance and infi ltration. Sanctions include a seven- Although the French President's remarks might come year prison sentence and EUR2m (USD2.6m) fi ne. as somewhat of a shock announcement, the idea that companies should shoulder the contribution is not Furthermore, the penalties applicable to legal per- new, and was fi rst put forward by French National sons in the case of tax fraud will be aligned with Assembly budget rapporteur Christian Eckert. those applicable to individuals, the tax administration's control powers will be strengthened, and the At the end of December 2012, France's Consti- regime for confi scating criminal assets will be rein- tutional Court censured the Government's ini- forced to guarantee the effi cient recovery of illegally tial plans for a 75 percent tax on individual an- held sums. nual income from professional activity in excess of EUR1m. Th e Court ruled that the Government Th e legislative framework for the country's spe- had not taken into consideration ability to pay, as cial national prosecutor, who will be responsible the tax was due to be levied on individuals rather for pursuing complex cases of tax fraud and cor- than to apply per household, thereby breaching the ruption, was presented to the Council of Minis- principle of equality before public charges. ters on May 7.

14 Smartphone Tax accounts held by French residents abroad, and to In his report on how to adapt French cultural pol- generate much-needed fi scal revenue for the state. icy to the digital age, former head of Canal Plus Pierre Lescure advocated that a tax be imposed on Defending the move, rapporteur of the Gov- smartphones and tablets "to fi nance the transition ernment's anti tax-fraud bill, Yann Galut, told to digital by French cultural industries." L'Opinion that in view of plans to signifi cantly harden existing legislation, by introducing tough- Lescure suggests in the report, published in May, er sanctions and by using new investigative tech- that a tax of one percent could be imposed on niques, including infi ltration and tapping, the spe- the sale of all Internet connected devices, provid- cial tax unit should be reconstituted. ing Internet access to cultural content. Th e measure is expected to yield in the region of EUR86m Underlining the need for absolute transparency, (USD111.6m) in revenue. Th e proceeds of the tax Galut stressed that sanctions must be determined would benefi t French art, music, and fi lm produc- according to a scale, with penalties varying between tions, in line with the country's principle of "cul- 30 percent and 50 percent of the sum of tax evaded. tural exception." France's fi rst regularization unit was set up back in Th e report rules out the idea of a so-called "Google April 2009, under former French President Nicolas tax," as sought by newspaper editors and the music Sarkozy. Active from April to December 2009, the industry in France. Th e legal feasibility of such a administrative unit enabled French residents with levy is "doubtful," it claims. assets illegally held off shore to repatriate their assets, and at the same time, to settle their accounts. Promoted by France in the 1980s, the notion of the Under the terms of the conditions, individuals "exception culturelle" is to protect French culture were required to regularize their accounts by pay- and language from market forces and in particular ing any taxes due, while in return benefi ting from from English language infl uences. State interven- favorable penalty rates. tion is vital to assuring the sustainability of a cultural off er that is "rich, varied, and accessible to the Th e unit was heralded as a success at the time by greatest number" of individuals, the report argues. the then Budget Minister Eric Woerth. It generated a total of almost EUR1bn (USD1.28bn) in addi- Tax Regularization Unit tional revenue, of which EUR887m resulted from In May it emerged that the French Government was late tax payments, and EUR70m derived from pen- considering the idea of reactivating the special tax alty payments. Around EUR7bn was repatriated "regularization unit," to detect hitherto undeclared and approximately 4,000 fi les were presented.

15 Corporate Tax Transparency Th e committee advocated that the taxation of die- In June, Finance Minister Pierre Moscovici an- sel be progressively aligned with that of petrol from nounced his intention to submit an amendment 2015. By gradually reducing the diff erential be- to the Government's banking reform bill, aimed tween the taxation of diesel and the taxation of pet- at increasing fi scal transparency within large busi- rol by EUR1 a year, the gap would narrow from 18 nesses in France. Under the proposal, all big cor- cents a liter currently to 10.6 cents a liter by 2020. porations will be required in future to make public their activities, and to reveal the level of tax due on Back in April, the committee underlined the im- a country-by-country basis. portance of removing the tax break accorded to diesel. At the time, the CFE insisted that the tax Th e move is an extension of initial plans to com- advantage is no longer justifi ed given the impact of pel banks in France to publish details each year of diesel both on health and on air quality. their subsidiaries, their activities, and their income in each country, particularly in so-called "tax ha- In parallel, the CFE suggested that a carbon tax be vens," or jurisdictions deemed uncooperative in introduced, within the framework of the domestic tax matters. tax on consumption (TIC). France's TIC tax includes, for example, the domestic tax on the con- Moscovici also confi rmed plans to transpose into sumption of energy products (TICPE), the domes- national law, via the banking bill, a European limit tic tax imposed on natural gas (TICGN), and the on bankers' bonus payments, and to include provi- domestic tax levied on the consumption of com- sions allowing an automatic exchange of informa- bustibles, including coal, lignite, and coke (TICC). tion with other countries, in line with the latest developments at international level, to combat tax Despite plans to apply the carbon tax from 2014, fraud and tax evasion. the measure is to be tax neutral for the fi rst year, off - set by a corresponding reduction in the TIC. How- Th e measures are to apply once similar European ever, the tax is to increase progressively from EUR7 initiatives enter into force. per tonne of carbon dioxide in 2014 to EUR20 per tonne in 2020. Carbon Tax Presided over by economist Christian de Perthuis, It is not expected that the CFE's carbon tax proposal the French committee on ecological taxation (CFE) will meet with opposition from the country's Con- put forward ambitious proposals in June aimed at stitutional Court. Perthuis insisted that the provi- ensuring that the taxation of fuel is more environ- sions merely modify the base of an existing energy mentally friendly in France in future. duty, rather than create a new tax. Furthermore,

16 Perthuis made clear that the plans are in accordance Th e report also proposes that the tax regime ap- with European law. plicable for listed real estate investment companies be revised. Established by the French Economy and Ecology Ministries, the committee on ecological taxation Finally, the report underlines the importance of was tasked with drafting proposals to reform eco- revising existing tax advantages given to French logical taxation in France, to save the Government overseas departments and reviewing fuel tax breaks. in the region of EUR3bn by 2016. Th ese include the reduced rate of the TICPE currently benefi ting taxis, farmers, and road hauliers Culling Corporate Tax Breaks in France. A revision of the Livret de Développe- In June, the Government-commissioned Quey- ment Durable (LDD), the tax-free sustainable de- ranne report proposed that the amount of fi nancial velopment savings account, is also recommended. aid and tax breaks currently benefi ting businesses in France be reduced by around EUR3bn. VAT On Yacht Services Pleasure yachting charter arrangements are newly Led by the French Socialist Jean-Jack Queyranne, subject to value-added tax from July 15, 2013, this report recommended that two thirds of the pro- following the European Commission's decision posed budget cuts is realized by reducing the num- to send a formal request to French authorities in ber of corporate tax breaks available to businesses, November 2012 requiring that the VAT exemp- while the remaining third is achieved by lowering tion off ered on the charter of yachts used for plea- public expenditure. sure boating purposes be revoked.

Th e report underlines the importance of main- In its reasoned opinion, the Commission ex- taining certain vital tax shelters, however, in- plained that Article 148 of the VAT Directive al- cluding the reduced rate of VAT accorded to the lows member states to off er a VAT exemption for construction industry, and the newly created com- certain transactions concerning vessels. However, petitiveness and employment tax credit (CICE – this exemption does not apply to luxury boats see below). used by individuals for recreational purposes.

Furthermore, the report suggests cutting the Th is was confi rmed by the European Court of Jus- amount of taxes allocated to the national cine- tice in a case in December 2010, involving Bacino ma center to the tune of around EUR150m and Charter Company SA. Th e court determined that reducing levies fl owing to the chamber of com- a VAT exemption may only be granted in circum- merce and industry by approximately EUR400m. stances where a vessel is chartered for use on the

17 high seas, for the purposes of commercial, industrial such organized trips. In its report, the task force or fi shing activities, but not recreational purposes. noted that such schemes have become less popular for middle-class families due to rising costs. France intends to off er a 50 percent VAT reduction to chartering arrangements impacted by the Tax Breaks Purge ruling, bringing them within the French VAT net On July 17, the Government unveiled a raft of mea- but subjecting them to VAT at a rate of 9.8 per- sures aimed at simplifying administrative proce- cent, rather than the headline rate of 19.6 percent. dures for both companies and individuals in France, Further guidance on this matter is expected from and at reducing state spending on tax breaks. Th e French tax authorities in due course. proposals are designed to reduce the public defi cit by around EUR3bn next year. Luxury Hotel Tax In July, a new report proposed the idea of introduc- Intending to cut spending on tax shelters (les niches ing a tax on luxury hotels, to fi nance holiday camps fi scales), the Government plans to reduce the in- and trips away for young people. come tax shelter benefi ting families, the "family quotient," to progressively reduce subsidies for the A task force attached to the National Assembly use of fi rst generation biofuels derived from plant Cultural Aff airs and Education Committee has products, and to reform tax breaks currently ben- suggested that a levy of between 2 percent and efi ting listed real estate investment companies in 6 percent could be imposed on luxury hotels in France. Furthermore, the Government intends to France. Proceeds of the tax, estimated at between lower tax rebates granted to farmers for using off - EUR100m (USD130m) and EUR200m, would go road diesel, and to cut tax breaks available to French to a national fund to support the plans. overseas departments and territories, including value-added tax exemptions. Th e proposal provoked a predictably frosty response from the hotel industry. Th e hospitality sector is al- Th e Government aims to dramatically cut red tape, ready facing a further rise in VAT. From January 1, thereby reducing administrative costs for business- 2014, VAT is to rise from 7 percent currently to 10 es, notably by simplifying the research tax credit percent. It was last increased from 5.5 percent to 7 (CIR), and by ensuring that more companies sub- percent on January 1, 2012. ject to corporation tax (IS) in France are required to declare and pay their tax bills electronically. Led by French Socialist Deputy Michel Ménard, the parliamentary group was tasked with examin- In addition, the Government plans to establish a re- ing accessibility for the young to camps and other lationship of trust between the Tax Administration

18 and businesses in France. Consequently, rather than Under the plans, the tax reductions accorded de- tax audits being carried out post-declaration, the pending on the holding period will be more pro- Tax Administration will carry out annual reviews, gressive in future. Furthermore, vendors will be considering tax options and obligations with busi- granted total exemption from income tax on real nesses prior to the submission of a corporate tax estate capital gains after a 22-year holding pe- declaration. Th is will result in a binding opinion, riod, instead of 30 years as is currently the case. enhancing legal certainty for fi rms. In addition, a progressive reduction in social levies (the CSG general social contribution and A bill providing for some of the measures is due CRDS contribution for the repayment of social to be presented in September. Further cost cutting debt) will apply, and a total exemption from so- initiatives are currently being considered. cial contributions will be granted after a 30-year holding period. Capital Gains Tax Reform On July 18, Budget Minister Bernard Cazeneuve To amplify the eff ect of this structural reform, unveiled details of Government plans to reform and to provide an immediate supply surge to the the taxation of real estate capital gains in France, to property market, an exceptional additional tax give a much-needed boost to the country's stagnant reduction of 25 percent will apply to sales real- housing market. ized between September 1, 2013, and August 31, 2014. Finally, the Government intends to abol- Th e main aim of the reform is to put an end to ish existing fi scal incentives encouraging con- the current tax system, initiated under the previ- structible land retention, to boost the housing ous Government in 2011. Th is regime encourages development market. property owners to delay putting their properties on to the market, for fi scal reasons, which has had Th e Government aims to publish a fi scal instruc- "very negative" repercussions for the French hous- tion shortly, setting out the precise modalities of ing market. As a result, the volume of property the planned tax reform. Th e proposals are to be in- transactions has plummeted, and there has also tegrated into the country's 2014 fi nance bill. been a corresponding reduction in home improve- ments undertaken following a change of ownership. Partial Income Tax Scale Freeze On July 30, it came to light that the Budget Minis- Due to apply from September 1, 2013, the Gov- try is examining the idea of extending the freeze on ernment's proposed reform will aff ect capital gains the country's income tax scale in 2014, albeit just realized from the sale of real estate, other than a for the country's top earners, as part of eff orts to taxpayer's main residence and rental property. redress the public fi nances.

19 Used as a basis for calculating individual income tax Hollande's Government to encourage businesses to (IR), France's six income tax brackets are traditional- invest for growth and generate new employment. ly reviewed and aligned every year with infl ation, to ensure that taxpayers do not pay more in tax merely Th e IMF had already identifi ed the emergence of due to an infl ationary wage rise or pension increase. a competitiveness gap between France and its peer nations as "the main challenge for macroeconomic In 2011, former French Prime Minister François Fil- stability, growth, and job creation," warning that lon decided to freeze the IR tax scale for a period of two France must act without delay or risk falling further years. Applied to both 2011 and 2012 income, taxed behind its European competitors. in 2012 and 2013 respectively, the freeze not only af- fected the country's wealthiest households but also Last year therefore, the Government commissioned impacted on France's middle class and modest earn- investment commissioner Louis Gallois to study ers. Th e measure generated EUR1.7bn (USD2.25bn) ways in which a business-led economic revival in supplementary tax revenues for the state in 2013. could be brought about. In his 74-page report, submitted in November 2012 to Prime Minister Jean- According to Le Parisien, the Government is current- Marc Ayrault, the former head of European aero- ly considering plans to index the fi rst two tax brackets space group EADS recommended that a dramatic with infl ation and to freeze the four remaining up- reduction in labor costs take place preferably over per tax tranches, within the framework of its upcom- a period of one year, or over a maximum period of ing 2014 Budget due to be presented in September. two years, to provide suffi cient breathing space for Although the initiative would amount to a tax rise companies in France. of just a few euros for some, for others the measure would raise tax bills by several thousand euros. To halt the decline of French industry and to support investment by means of a competitiveness or In June, President François Hollande conceded that confi dence "shock," Gallois put forward the idea of further tax rises will be necessary next year. Th e transferring EUR20bn in employer contributions Government has identifi ed that an additional fi scal and EUR10bn in employee wage contributions eff ort of EUR20bn will be needed in 2014 to re- onto taxation. duce the public defi cit, of which EUR6bn will fl ow from tax rises. Under the plans, two-thirds of this eff ort would come from a 2 percent rise in the country's general social Th e Gallois Report And Th e CICE Tax Credit contribution (CSG), yielding between EUR20bn Juxtaposed to this tidal wave of proposed and po- and EUR22bn. Other proposed measures includ- tential new revenue measures are eff orts by the ed plans to increase certain "intermediary" rates of

20 VAT (excluding basic products), and to initiate a for competitiveness and employment (CICE) rath- review of environmental taxation (carbon tax), the er than employer payroll contribution cuts as Gal- fi nancial transactions tax, property tax, as well as lois advocated. existing tax breaks. Th e CICE is to have an impact on all the produc- Th e country's employment laws would be softened tion chain in France, not only on French industry, and other measures include the preservation of bud- but also on the country's agricultural and service gets for research and innovation, the strengthening sectors, and is intended to encourage large groups of training schemes, and the maintenance of fi scal to create and to maintain jobs in France. incentives designed to support small- and medium- sized companies. Th e EUR20bn cut in labor costs is to be fi nanced by EUR10bn in additional cuts in public spend- Shortly after the publication of the Gallois report, ing, and by EUR10bn from restructuring VAT Ayrault unveiled details of the government's plans rates and from a new environmental tax. Th e new to boost growth, competitiveness and employment ecological tax, to be examined within the frame- in France, by reducing the cost of labor. Underlin- work of discussions on a shift in energy policy, is ing the need for "ambitious and courageous deci- to take eff ect in 2016. sions" to be taken Ayrault said that the government had decided to implement almost all of the recom- Changes to VAT will enter into force in France on mendations proposed by French investment com- January 1, 2014. Th e intermediate VAT rate, cur- missioner Louis Gallois in his report. rently benefi ting the catering and property renova- tion sectors, will be increased from 7 percent to 10 To give companies room to maneuver, the gov- percent. Th e standard VAT rate is to rise from 19.6 ernment has decided to retain the fi rst, "massive" percent currently to 20 percent. and "unprecedented" measure proposed in the report, namely the EUR20bn cut in the cost of In contrast, the reduced VAT rate benefi ting basic labor. Th is reduction is being implemented over products, in particular food, is to be reduced from a period of three years, with a cut of EUR10bn 5.5 percent currently to 5 percent, a measure tar- planned for 2013, and an additional EUR5bn cut geting modest households in France, namely those in both 2014 and 2015. households who spend a signifi cant part of their budget on food and energy. Th e cuts apply to wages of between 1 and 2.5 times the minimum wage, corresponding to a 6 percent Th e CICE is the Hollande administration's fl ag- cut in labor costs, and take the form of a tax credit ship measure to boost business investment and

21 employment generation in France. Th e CICE pre- fi scal reform is undertaken to establish a stream- fi nance mechanism aims to give immediate cash lined government and a tax regime bearing a lower fl ow support to companies, by allowing banks to tax-to-gross domestic product ratio. fi nance up to 85 percent of the CICE tax credit in advance. Th e scheme was made available to all Th e IMF argues that the new measures, while ad- companies in France, irrespective of their size, dressing the competitiveness concerns, fall some on April 5 and in June the Finance Ministry an- way short of the recommendations in both its renounced plans to waive the EUR150 pre-fi nance port and the Gallois report. Gallois had originally fee for the CICE. called for measures worth up to EUR50bn, but not less than EUR30bn, implemented within two years, Nevertheless, the IMF said that the Government's but ideally within one, to have "maximum eff ect". response to the Gallois report was a missed opportunity to simplify and re-engineer the tax regime to While France is to make some cuts to the size of gov- address its deteriorating competitiveness in Europe. ernment in response to the Gallois report, the IMF warned that the temporary tax breaks announced In its 2012 report, the IMF suggested that with Eu- provide new investors with no certainty that the tax ropean nations targeting substantial reductions in system will be attractive in the medium-term, and public expenditure and more attractive tax regimes, merely add an extra layer of complexity to a na- France's long-standing policy of a large govern- tional tax regime described as prohibitively onerous ment funded by high taxes no longer squares up in in both reports. a post-crisis setting. Th e Mandon Report "Th e loss of competitiveness predates the crisis," On July 2, 2013, the French Finance Ministry pub- the IMF report stated. However, it warned that this lished Th ierry Mandon's report on plans to simplify competitiveness gap could become "even more se- the regulatory and tax environment for businesses vere if the French economy does not adapt along in France. with its major trading partners in Europe, notably Italy and Spain which, following Germany, are now Th e Mandon report advocates that objectives engaged in deep reforms of their labor markets and should be fi xed over a period of three years, aimed services sectors". at abolishing 80 percent of business costs that result from procedural complexities and delays. Proposals With economic growth sluggish and unemploy- to remove unnecessary bureaucracy in the tax and ment expected to rise next year, the report warns regulatory system should be drawn up collabora- that France faces being left behind unless rapid tively between taxpayers and the Government says

22 the report, with additional input from Parliament the tax on company cars (TVS) is included on the and the Court of Auditors in the drafting and eval- tax return, and that a single form is created to en- uation of the tri-annual action plan. able taxpayers to fi le a return online for the local tax on external advertising (TLPE). As a matter of priority, Mandon highlights the ur- gent need to reform and to streamline the research It will certainly be another step in the right direc- tax credit (CIR) provisions. To ensure that the CIR tion as far as France's beleaguered businesses are tax break is more in line with economic realities in concerned if the French Government decides to act future, certain expenditure that is currently exclud- on Mandon's recommendations. However, it is not ed from the CIR calculation, without any economic a foregone conclusion that it will do so. While the reason or legal basis, must be included in the scope Government claims to have taken up the majority of of the mechanism, Mandon says. Furthermore, the Gallois's recommendations, the CICE was not pro- depreciation of all assets allocated to research and posed in his report, and the Government stopped development should be taken into account. Man- short of delivering the "competitiveness shock" that don also recommends that the fi nancial year and the investment commissioner had called for, prefer- not the calendar year is used for the CIR calcula- ring instead to follow what it termed a "competitive tion and that all patent accounting expenses and all trajectory." Indeed, before the Gallois report was social contributions are taken into consideration. even published, Finance Minister Pierre Moscovici went on the record to express his opposition to the Other tax measures advocated in the report include scale of the report's recommendations. It remains plans to reduce administrative procedures for tax to be seen therefore if words are put into action as a audits, by imposing a deadline on the Tax Admin- result of the Mandon study. And in the meantime, istration for issuing a response to small- and medi- the general tax burden looks set to continue rising, um-sized companies in France. Tax instructions are as illustrated in the following section. to be published by specifi c dates to ensure visibility, and a clear point of contact is to be established France's Rising Tax Burden and within the Tax Administration, to liaise with busi- Falling Competitiveness nesses and to keep detailed and accurate records Recent fi gures suggest that the barrage of taxation during corporate tax audits. shows few signs of slowing down, with much needed spending cuts still expected to play a minor role Finally, Mandon suggests that corporate tax return in budgetary consolidation eff orts. Within the 2013 forms are simplifi ed, that reporting procedures for Budget, tax measures were expected to contribute the levy on the value added by a company (CVAE) 1.4 percent out of a 1.8 percent fi scal defi cit reduc- are simplifi ed and included in the tax return, that tion, with spending cuts supplying the remainder.

23 In all, the rapid fi scal consolidation of 2011-13 has in the league table, just behind Albania, Romania relied heavily on revenue measures, with a projected and Bulgaria.2 increase in the tax-to-GDP ratio of 3.7 percent over the three years. Over the same period, expenditure "Institutional strengths related to the protection of growth was also reduced considerably, but the ratio private property rights and an effi cient regulatory of structural spending to GDP has declined by only framework are beginning to be eroded by popu- 0.3 percent. list policy choices that favor income redistribution and maintenance of costly welfare programs," says Th e French Government feels that its tax measures the 2013 report. "Undermining productivity and are justifi ed because they are mainly targeted at effi ciency, the state continues to dominate major the wealthy and large companies. Indeed, in May, sectors of the economy and remains a large share- French Budget Minister Bernard Cazeneuve de- holder in many semi-public enterprises." fended the fact that around 8,000 households in France paid over 100 percent of their income in tax France has also slipped to 53rd place (out of 185 last year, arguing that these "privileged" taxpayers countries) in PwC's latest ease of paying taxes rank- are among the country's wealthiest individuals and ings. According to PwC, it now takes businesses on have been able to benefi t from tax optimization average 132 hours per year to comply with their tax techniques in the past. obligations in France, while they can expect to see 65.7 percent of their profi ts taken by the Govern- However, the IMF warns that a perceived risk that ment in the form of taxation.3 taxation will increase further appears to be one of the factors holding back spending and investment Th e problem for Hollande's Government now, by households and business, without which the however, as it attempts to renew economic growth, economy stands little chance of fully recovering. is that the message being sent with its eff orts to im- What's more, France's reputation as an investment prove the business and corporate investment envi- destination among foreign investors must surely be ronment in France is being drowned out by the ris- taking a hammering. For example, it is shocking, ing tide of taxation generally, and the increasingly but perhaps not that surprising given the above, to negative perception in the mind of foreign investors discover that France is no longer considered a "free" that France is a high-tax and not-especially-welcom- economy by the Index of Economic Freedom, pub- ing place to do business. Th ese perceptions are only lished annually by the Heritage Foundation and likely to persist with the President determined to the Wall Street Journal. Th e Index measures 10 introduce a 75 percent top rate of income tax, even freedoms – from property rights to entrepreneur- though experience in other countries, like the UK ship – in 185 countries, and France is placed 62nd with its 50 percent top rate, shows that it will lead

24 to little or no new revenues, and perhaps even a fall about starting or expanding a business. Still, France's in tax receipts. Indeed, in response to Budget Min- loss could very well be its competitors' gain. ister Cazeneuve's comments earlier this year, the President of the National Assembly's Finance Com- E NDNOTES mittee Gilles Carrez warned that there is a danger 1 http://www.imf.org/external/pubs/cat/longres. the French tax system is becoming "confi scatory." aspx?sk=40854.0 When such strong words are used within the upper 2 http://www.heritage.org/index/ranking echelons of French political life, investors, especially 3 http://www.pwc.com/gx/en/paying-taxes/data- those located abroad, are going to be very nervous tables.jhtml

25 FEATURED ARTICLES ISSUE 40 | AUGUST 15, 2013

Tax And The Treasury Center: Cash Management And Cash Pooling by Mark Minihane, Associate Partner, International Tax Services, Ernst & Young LLP, Birmingham, UK

Speed Read : Th is article explores the key tax issues involved in a typical group cash management structure. Consider- ation is given to the primary methods of cash pooling, organization; there are no actual movements of the potential benefi ts of cash pooling structures and the funds between the accounts. Credit and debit bal- key tax issues to should be considered. ances on the accounts included within the notional pool are brought together and off set to establish What Is Cash Pooling? a net position for the calculation of interest due Cash pooling can be used to manage cash within and payable. an organization. One simple approach is known as "notional cash pooling," which involves inter- Th e overdraft facility attaching to the arrangement est payments and bank charges being made based is connected to each account covered and the bal- on the net position of the group as a whole, rather ances remain in the accounts of the respective par- than based on each entity's individual account bal- ticipants, with no cash actually being transferred. ance. Another approach is the physical concentration or sweeping of cash into one central account, Th e key point here is that the cash remains legal- which is known as "zero balancing." ly owned by the local jurisdiction, although it is notionally refl ected in the master account in the In this article we will explore the two diff erent types lead company's jurisdiction. Interest payments are of cash pooling and discuss some of the reasons made by the bank into the master account, based why organizations might implement a cash pooling on the combined balance, and this can then be structure. We will also discuss some of the key tax re-allocated to each participant based on their ac- issues that should be considered before implement- count balance. ing a cash pool. Th is method therefore does not result in any in- What Are Th e Diff erent Cash Pooling Models? ter-company balances between the master account Notional cash pooling is based on the notion- holder and each participant; a key diff erence be- al consolidation of account balances held by an tween zero balancing, which is described below.

26 Zero balancing works by each company in the balance at the end of each period. Th e target is usu- cash pool maintaining an account with a specifi c ally positive and is set by the group. bank, the balance in which is automatically set back to zero (or a targeted amount) at the end of Th e key distinction between zero balancing and each period. notional cash pooling is that under zero balancing, cash is actually transferred from each sub- Th e principal company, which will manage the account to the master account (or vice versa ) at cash pool, sets up a master account with the pro- the end of each period to eff ectively bring each vider of the cash pooling facility. Th e master ac- account balance to zero. count is debited to settle all the debit balances on participating accounts, or credited with the sur- Interest payments are made by the bank into plus if there is a net credit on these accounts. the master account based on the combined balance. This can then be re-allocated to each In other words, each company physically transfers participant based on their sub-account balance their account balance at the end of each period into transferred. This method therefore creates, or a master account, eff ectively combining various ac- increases, an inter-company balance between counts into one single account. the master account holder and each participant. Interest is also paid between the master account A variant on this is target-balancing where each holder and each participant based on these in- account is automatically brought back to a target ter-company balances.

27 Why Do Organizations Use Cash Pooling? Concentration of funds from multiple bank ac- Th e typical benefi ts that an organization would counts in diff erent jurisdictions into a central look to achieve through a cash pooling arrange- location, e.g ., to repay external debt, fund acquisi- ment include: tions or achieve better investment returns; Increased visibility of cash fl ows and how cash is Consolidation of payment activity on intra-group and generated and used in the organization; external payments through a single payment center Access to cash previously trapped in various parts of the business; Th e above is by no means an exhaustive list and or- Reduction in working capital tied up in diff erent ganizations will need to assess their required objec- jurisdictions; tives for managing cash before they decide to pro- Improved management of foreign exchange risk ceed with a cash pooling structure. arising as a result of having balances in diff erent currencies; What Issues Need To Be Considered Centralization of management and control of Before Implementing A Cash Pool? short-term cash; A number of issues will need to be determined be- Access to preferential rates of interest on surplus fore an organization is able to proceed with a cash cash and borrowings; pooling structure, including bank capital adequacy

28 rules, exchange controls and legal requirements in eff ect on the viability of the arrangement. Th e ta- each of the local jurisdictions. ble below summarises the key tax issues that are likely to arise and compares the two main types Tax issues in each of the jurisdictions seeking to of cash pooling: sign up to the structure could have a signifi cant

Issue Notional pooling Zero balancing Withholding Interest payable or receivable is bank interest Participating companies now pay or receive tax but, in most cases, interest will arise on non- intercompany interest. Some jurisdictions have resident accounts. thus any withholding tax on exemption from withholding tax on bank interest cross-border bank interest should be considered, but not on intercompany interest. Additionally, as well as the impact of relevant tax treaties. interest is now overseas interest rather than interest paid or received locally, therefore there may be different rates of withholding tax. Stamp / Stamp duty may be chargeable on the As for notional pooling, stamp duty may be capital duties cash pooling documentation signed by the chargeable on the cash pooling documentation participating companies. signed by the participating companies in certain jurisdictions. Transfer The interest is paid to, or received from, a third Since the interest is now being received from, or pricing party. Any transfer pricing legislation should not, paid to, connected parties, the rate of interest in most cases, apply. However, any allocation charged should be determined in accordance with of beneﬁ ts of the cost pooling, guarantees, or any domestic transfer pricing legislation (normally recharge of administrative costs/bank fees would this is an arm's length rate). Similarly, any allocation have to be in accordance with relevant transfer of beneﬁ ts of the cost pooling, guarantees, recharge pricing legislation. of administrative costs or compensation for increased risk undertaken by master account holder, would have to be in accordance with relevant transfer pricing legislation. Thin Although any debt will be third party debt, Since participants are moving from third party capitalisation thin capitalisation should still be considered debt to connected party debt, any domestic thin since, for example, the existence of cross capitalisation rules may affect the participating guarantees or the "group" nature of the cash companies. This may result in interest payments pooling arrangement may invoke domestic thin not being available for deduction. capitalisation legislation to restrict deduction for interest payments. Foreign The cash pool header account may take on As for notional pooling, the cash pool header exchange additional foreign exchange risk if it manages account may take on additional foreign exchange foreign exchange on behalf of the participating risk if it manages foreign exchange on behalf of companies, and any gains or losses could the participating companies, and any gains or be taxable. losses could be taxable. Permanent This issue could arise if, for example, the master As for notional pooling, this issue could arise if, establishment account holder and bank are resident in different for example, the master account holder and bank tax jurisdictions or the cash pool is managed by are resident in different tax jurisdictions or the personnel in another jurisdiction, on behalf of cash pool is managed by personnel in another master account holder. jurisdiction, on behalf of master account holder.

29 Conclusion structure. Transfer pricing would need to be con- Th ere is no one right way to structure a cash pool- sidered, particularly in respect of the allocation of ing arrangement, but whichever approach an or- the "pool benefi t" across all of the participant terri- ganization adopts, there are likely to be a number tories. Th e importance of documentation and sup- of tax issues which need to be considered for each port for the applicable interest rates that will apply of the jurisdictions considering signing up to the in the structure cannot therefore be underestimated.

30 FEATURED ARTICLES ISSUE 40 | AUGUST 15, 2013

Topical News Brieﬁ ng: it is certainly not currently evident. Furthermore, a Bolting The Door To A Carbon Tax carbon tax does not appear to be on the list of items by the Global Tax Weekly Editorial Team that the President wants included in a tax reform Grand Bargain with the Republicans. Instead, tax Just in case there was the remotest chance that policy in this area is currently focused on providing President Obama could sneak through a US carbon tax credits for clean energy generation, and is likely tax while nobody was looking, the Republican-led to remain so for the foreseeable future at least. House of Representatives has just approved legislation to prevent that from happening. Carbon taxes, pricing mechanisms and trading schemes are being tried out in various countries A carbon tax, or more accurately, a cap-and-trade around the world, but they are unpopular with both carbon emissions trading system, appeared on the businesses and individuals because they tend to add President's environmental agenda very early in his another layer of cost into the supply chain, while presidency, but it was always going to be a hard sell there is little evidence yet that they actually work. while businesses were closing their doors and un- So a carbon tax is unlikely to catch on in America. employment lines were growing. So it was quietly shelved. Although the US economy is currently in One benefi t for governments is that these schemes a slightly healthier position, it could be argued that raise additional revenue, and the International the odds against a carbon tax being approved by Monetary Fund recently suggested that a US carbon Congress now are even longer, given the preponder- tax could help reduce the federal defi cit. However, ance of right-wingers in the House. So the amend- a carbon tax that is not much more than a revenue- ment to the so-called REINS bill added by Steve raiser is only going to raise Republican hackles fur- Scalise (R – Louisiana) requiring Congressional au- ther, and perhaps even a few Democrat ones too, thority for any sort of tax or fee on carbon emissions especially among those who represent constituen- would seem to be overkill on the part of the GOP. cies where heavy industry is a major employer.

Although not a single Democrat voted in favor of At least one thing that this exercise has achieved is the Scalise amendment (and not a single Republi- to emphasize the partisan divide in Congress, for can voted against it), if viewed objectively outside anyone who might have been swayed into believ- of the highly polarized world of Th e Hill, there ing otherwise by the recent touring double act of is probably going to be little enthusiasm among Messrs Camp and Baucus, which has been playing Democrats for a carbon tax, or some form of emis- to packed houses across the nation. Did they go to sions trading scheme, right now anyway. If there is, Peoria, though? Th at's the acid test.

31 FEATURED ARTICLES ISSUE 40 | AUGUST 15, 2013

Finance Act 2013 Introduces The UK's New Statutory Residence Test by David Klass and Janice Houghton, Gide Loyrette Nouel LLP

Implications For Termination Payments And Other Considerations Th e Finance Bill 2013 received Royal Assent on July 17, bringing into law the new Statutory Residence year into two separate UK-resident and non-UK Test and abolishing the concept of "ordinary resi- resident portions depending on whether certain dence" for income and capital gains tax purposes (and factual scenarios ("Cases") apply; and also where relevant for inheritance tax and corpora- limit the "foreign service" exemption for employ- tion tax purposes) with eff ect from April 6, as sum- ment service from Tax Year 2013-14 onwards only marized in the June 13 issue of Global Tax Weekly. to duties performed outside the United Kingdom.

Th is article outlines some of the later stage changes made Foreign Service Exemption to how the new rules will work, along with raising some (Termination Payments) practical pointers to be aware of in applying them. Th e most signifi cant of these changes is the amendment to the defi nition of "foreign service" for Tax Amendments To Th e Statutory Years from 2013-14 onwards. Residence Test Th e Government introduced changes in the fi nal Th e foreign service exemption applies to exempt version of the legislation which, the most minor termination payments falling within s.401 ITEPA amendments aside: 2003 (broadly speaking, non-contractual "ex gra- altered the way the third "automatic residence" tia" payments) from tax either in full where any of test (working full-time in the UK over a period the three threshold-based tests are met: of a year) works so that a person does not auto- at least 75 percent of the employment being matically become UK resident simply because he foreign service; works one full day in the relevant tax year which the last ten years being foreign service where ser- is outside the 365 day period; vice is longer than ten years; or amended the "split year" rules, which operate at least half of service including the last ten years when an individual becomes or ceases to be UK being foreign service where service is longer than resident part way through a tax year to split the twenty years,

32 or to exempt any proportion of the termination 7. coming to live in the UK with a partner ceas- payment relating to "foreign service" if none of ing to work full-time overseas; and the threshold-based tests are met. 8. beginning to have one's only home in the UK.

Whereas previously UK duties during periods when Th e fi nal changes limit the application of "Case 6," an employee was not ordinarily UK resident would and amend the order of priority in which the various also have counted as foreign service as well as non- Cases apply where more than one Case is relevant. UK duties, now only duties actually performed outside the UK will count as foreign service when Case 6 applies split year treatment for an individual assessing whether any of the foreign service thresh- on ceasing full-time work abroad, having been non- old tests are met for full exemption of a termination UK resident in the previous tax year because of full- payment from tax. time working overseas under the third automatic overseas test and meeting the overseas work criteria; Likewise, where the threshold tests are not met, only the UK part of the relevant year begins from the non-UK duties count for assessing what element of point at which the "suffi cient hours" test (which an employee's termination payment relates to foreign involves applying a prescribed calculation to estab- service and is exempt from tax in that proportion. lish whether on average more than 35 hours a week are worked overseas during the "relevant period") Split Year Rules ceases to be met. As a reminder, where certain criteria are met, the new statutory split year rules apply split year treat- Case 6 will now not apply if the individual was not ment for Tax Year 2013-14 onwards in a series of UK resident in any of the previous fi ve years, on scenarios (eight "Cases"), which are, broadly: the basis that the application of split year treatment under Case 6 would be inappropriate for someone "leaver cases" with no previous UK connections, who under Case 1. leaving to work full-time overseas; 6 as previously drafted could have split year treat- 2. going abroad to live with a partner starting ment applied from a date well before they even work full-time overseas; came to the UK. 3. leaving to work full-time overseas; Th e amendments to the order of priority in which "arriver cases" Cases apply are intended to more closely replicate 4. beginning to have one's only home in the UK; the split year treatment previously given under the 5. starting to work full-time in the UK; Extra Statutory Concessions that the new legislation 6. ceasing to work full-time overseas; replaces (in the legislation as previously drafted, if

33 several Cases applied, the Case giving the shortest In addition, for split year purposes, the various thresh- overseas part took priority). olds based on numbers of days and the reference periods under the applicable Statutory Residence Test Th e legislation now applies two separate orders limbs are in general proportionately reduced. of priority: Where, in applying the Statutory Residence Test, Where any of Cases 1, 2 and 3 apply (the "leaver" Cas- it is necessary to take into account an individual's es listed above), Case 1 will take priority over Case 2 residence position in any previous years where the and Case 3, and Case 2 will take priority over Case 3. old rules applied, it is possible to elect to use the new rules to determine that position instead. Mak- Where more than one of cases 4, 5, 6, 7 and 8 apply ing this election will not, however, change what (the "arriver" cases listed above): the individual's actual residence position was in If both Cases 5 and 6 apply, whichever of those those years. Cases produces the earliest split year date will take priority. It is worth reiterating that now, due to the aboli- If both Cases 5 and 7 apply but Case 6 does not, tion of the concept of ordinary residence for in- again whichever of Case 5 and Case 7 produces come and capital gains tax purposes, (but subject to theearliest split year date will take priority. transitional provisions applying the old "ordinary If, in circumstances where neither Case 6 nor Case residence"-based relief rules for persons resident 7 apply, but more than one of Case 4, 5 and 8 but not ordinarily resident in Tax Year 2012-13 for apply, whichever Case produces the earliest split a time limited period) the remittance basis will in year date (or Cases if they produce the same date) future no longer be available for those who are UK will apply in priority. domiciled and resident but who previously would have been not ordinarily resident. Practical Pointers And Wider Consequences It should be noted that where an individual is seek- However, as explained in the June 13 article, one ing to apply the "full-time work overseas" automat- consequence of the abolition of the concept of or- ic overseas limb of the Statutory Residence Test, dinary residence is that Overseas Workday Relief there must be no "signifi cant break" in employ- will now apply for up to three years on a simpler, ment (over 30 days passing without either working statutory basis for all non-UK domiciles who have more than three hours on at least one day or being been non-UK resident for three continuous tax on annual leave, sick leave or parenting leave); par- years (again subject to similar transitional provi- ticular caution is therefore needed when there are sions) allowing the remittance basis to apply to re- changes in overseas employment. muneration paid to them outside the UK for duties

34 performed outside the UK on an apportionment depending on the employment arrangements in basis according to UK and non-UK duties. place relief may be available under a double taxation agreement and a UK employer may also be From a practical perspective both for Overseas able to make an application to HMRC to operate Workday Relief and for the purposes of evidencing PAYE only on an appropriate percentage of salary. an individual's position under the Statutory Resi- dence Test, it is important to keep adequate records In addition, anti-avoidance provisions which have such as a business diary of days worked and relevant eff ect in relation to periods of temporary non-resi- evidence such as travel documents. dence will continue to apply, but in modifi ed form where an individual's year of departure is 2013-14 Depending on where else an individual is living or later. and working, his tax position may also be aff ected by any double taxation agreements in place with It should also be noted that the Statutory Residence the other country; his residence position under the Test will not apply for National Insurance Contri- Statutory Residence Test may be overridden by dou- butions purposes; the existing rules for NICs re- ble taxation agreement residence provisions such garding residence and the concept of ordinary resi- as "tiebreaker" clauses. In secondment scenarios, dence continue to apply.

35 FEATURED ARTICLES ISSUE 40 | AUGUST 15, 2013

OECD Project On Intangibles: Revised Discussion Draft Released by PricewaterhouseCoopers

July 31, 2013

In Brief Approximately one year after publication of the fi rst Discussion Draft on the Revision of Chapter formalised by the OECD through the concept of VI of the OECD Guidelines on Intangibles (In- "important functions," which in content consist of tangibles), the OECD released on 30 July 2013 its the crucial activities and decisions identifi ed under Revised Discussion Draft on the Transfer Pricing the prior Discussion Draft. Aspects of Intangibles. Th is comes shortly after the release of the OECD's Action Plan on Base Erosion In Detail and Profi t Shifting (BEPS) on July 19 where work In essence, the legal owner of an intangible will be on intangibles is listed as one of the actions (Action entitled to all returns attributable to the intangi- 8). Interested parties are invited to comment on the ble only if, in substance, it performs and controls Revised Discussion Draft by October 1, 2013. the important functions related to the development, enhancement, maintenance and protection Th e Revised Discussion Draft has been prepared on of the intangible; provides all assets necessary for the basis of the numerous comments the OECD re- the development, enhancement, maintenance and ceived on the prior Discussion Draft and contains protection of the intangible; bears and controls all several important changes. Th e overarching part of of the risks and costs related to the development, the documents provides additional guidance on the enhancement, maintenance and protection of the question of how to correctly allocate what may be intangible. Th e Revised Discussion Draft clarifi es described as the "return related to an intangible" that legal ownership by itself does not confer any (or intangible related return). Th e Revised Discus- right to ultimately retain any return from exploit- sion Draft states that although contractual relation- ing the intangible. ships between related parties will continue to serve as a starting point for any transfer pricing analy- Th e OECD takes the view that the legal owner is sis, the location where material functions related to free to outsource certain intangible asset-related intangible assets are performed is considered to be functions. In those cases, however, the legal owner key. Th is focus on functional value creation is being will need to control the functions outsourced and

36 compensate those on an arm's length basis. How- be substantially reduced if the tested party performs ever, to the extent that all or part of the impor- "important functions." Under such circumstances, tant functions are being outsourced to or are being the comparable uncontrolled price method and the performed by one or more members of the MNE profi t split method are clearly appreciated. More- group other than the legal owner, all or a substan- over, it may be helpful to revert to other (i.e . non- tial part of the return attributable to the intangible OECD recognized methods), which should how- would need to be allocated to the parties actually ever not be used to substitute OECD-recognised performing the important functions. Th e revised methods and an in-depth functional analysis. guidance leaves no doubt that the mere funding of intangible-related costs (and the funding risk relat- Additional guidance has furthermore been included ed thereto) without the assumption of any further with regard to the utilization of valuation techniques. risks, any control over the use of the funds provided In this respect, the Revised Discussion Draft clear- or the actual performance of funded activities will ly states that it might be appropriate to determine only entitle the funder to a risk-adjusted rate of an- and use a range of present values evaluated from the ticipated return on the capital invested. No entitle- perspective of the transferor and the transferee. Th e ment to the premium profi t generated through the indicative use of values determined for accounting intangible should be granted in such case. purposes (e.g. as part of a purchase price allocation) is recognised but it is stated that such valuations are Th e Revised Discussion Draft confi rms a major take- not determinative for transfer pricing purposes and away of the prior Discussion Draft namely that in should therefore be utilised with caution within the matters involving the transfer of intangibles or rights framework of a transfer pricing analysis. in intangibles, it is important not to simply assume that all residual profi t after routine returns should Th e most notable other changes are the addition of necessarily be allocated to the owner of the intangi- a new section addressing features of the local mar- bles. Instead, the Revised Discussion Draft calls for a ket, locations savings, assembled workforce and functional analysis that provides a clear understand- corporate synergies; explanatory changes to the ing of the MNE's global business processes and how defi nition of intangibles; the inclusion of a section the intangibles interact with other functions, assets on transfer pricing aspects of the use of corporate and risks that comprise the global business. names and the addition of several new examples and the revision of some of the examples of the pri- Th is implies that a one-sided comparability analysis or Discussion Draft providing practical guidance may not provide a suffi cient basis for evaluating a on how to apply the considerations for intangible transaction involving intangibles and that the reli- property. Th ose changes are further summarised ability of a one-sided transfer pricing method will and analysed below.

37 Changes To Deﬁ nitional Aspects length pricing of related party transactions and that On Intangibles it should be further considered how independent Th e Revised Discussion Draft includes expanded parties would e.g . share advantages or disadvantages guidance on the categories of intangibles, which related thereto. continue to be broadly split into marketing ("customer-facing") and trade intangibles (intangibles Location Savings And Other Local Market Features not being marketing intangibles). Furthermore, Th e OECD had addressed the potential impact of a short defi nition on "unique and valuable intan- location savings such as lower labor or real estate gibles" has been added, although the Discussion costs within the context of Chapter IX on business Draft makes it clear that the classifi cation of an in- restructurings, but now states that the principles re- tangible will not impact the level of transfer pric- lated thereto would as such apply to all situations ing analysis to be performed or the transfer pricing where such location savings are present. If location methodology to be used. It views that intangibles savings exist and are not passed on to third party intend to address " something which is not a physi- customers, then the question as to how these ad- cal asset or a fi nancial asset, which is capable of be- vantages would be shared among related parties is ing owned or controlled for use in commercial activi- seen to be best addressed by the use of compara- ties, and whose use or transfer would be compensated ble entities and transactions in the local market. If had it occurred in a transaction between independent it is not possible to identify reliable local market parties in comparable circumstances." Th e Discus- comparables, comparability adjustments may be sion Draft confi rms that it remains important to required in order to account for the existence of distinguish intangibles from market conditions or location savings. circumstances that are incapable of being owned or controlled by a single enterprise. Furthermore, other local market features not result- ing in location savings (such as the size of the mar- Amendments To Chapters I And II: ket or the purchasing powers of local households) Introduction Of New Comparability may aff ect arm's length pricing and require com- Features And Th e Use Of "Other Methods" parability adjustments. Th e OECD furthermore In relation to the above, the Revised Discussion emphasizes that it will be important to distinguish Draft provides additional guidance on the applica- between features of the local market and contractu- tion of the arm's length principle in the context al rights or government licenses which may be nec- of location savings and other local market features, essary to exploit a local market ( e.g. regulatory li- assembled workforce, as well as MNE group syn- censes for investment management business). Such ergies. Th e Discussion Draft recognizes that these valuable contractual rights and government licenses elements can have a material impact on the arm's may constitute intangibles, and the contributions

38 of both the local group member and other group group action" which provides MNE members with members in supplying capabilities necessary to ob- "material" advantages, e.g . under the example of tain such rights or licenses should be assessed. a centralized purchasing organisation. Benefi ts of group synergies should then generally be shared by Assembled Workforce MNE members in proportion to their contribution Th e Revised Discussion Draft states that a "unique- to the creation of the synergy. ly qualifi ed or experience cadre of employees" may aff ect the arm's length price of services pro- Th e Use Of "Other Methods" vided between related parties. To the extent pos- In addition, the Revised Discussion Draft fore- sible, the benefi ts or detriments of such employee sees that Chapter II of the OECD Transfer Pricing group should be determined in comparison with Guidelines (Transfer Pricing Methods) would be the workforce of companies engaged in comparable amended in a way to provide tax administrations transactions (which in practice might be diffi cult to with the possibility to use methods other than the achieve). Th e wording suggests that the mere trans- fi ve recognised OECD-methods (this option was fer of workforce, if not "along with other assets" under the initial version limited to MNE groups). would not give rise to a separate compensation by However, such "other methods" should not substi- default. Rather, the existence of assembled work- tute the fi ve recognised OECD methods, and the force may result in time and expense savings for the Revised Discussion Draft also takes a critical stand service recipient and should then be refl ected in the on the use of rules of thumb which are not consid- arm's length price. Th ere is also a recognition of the ered to provide an adequate substitute for a com- fact that workforce transferred may create potential plete functional and comparability analysis. liabilities and limit the transferee's ability to structure its business going forward. Ownership Of Intangibles And Intangible-Related Returns MNE Group Synergies Th ere have been material changes to Section B of Member of a multinational enterprise (MNE) may the Discussion Draft dealing with the ownership of benefi t from group synergies which would not be intangibles, the functions, assets and risks related to available to independent companies in similar cir- intangibles, as well as the entitlement to intangible- cumstances. Examples thereof are combined pur- related returns. chasing power, economies of scale and increased borrowing capacity. Th e wording on such group Recharacterization Of Transactions synergies clarifi es that under the arm's length prin- Th e Revised Discussion Draft now explicitly in- ciple, remunerations are only considered to be ap- cludes the notion that in "exceptional circumstanc- propriate if there has been a "deliberate concerted es" as described in Chapter I of the OECD Transfer

39 Pricing Guidelines, it may be necessary to rechar- Examples acterise transactions related to intangible assets in Th e Revised Discussion Draft continues to include order to refl ect arm's length conditions. Chapter a large number of examples destined to illustrate the I foresees recharacterization of transactions if the application of the principles outlined. Th e majority economic substance of the transaction diff ers from of examples have been retained, whereas some have its form or in case the arrangements impede the de- been updated in order to align them to the adjust- termination of an arm's length transfer price. ed guidance. Further examples have been added on comparability considerations and the utilisation of Specifi c Fact Patterns valuation techniques. Th e Revised Discussion Draft furthermore includes more in-depth consideration of specifi c fact pat- Further Work terns related to intangible assets which are often Further work of the OECD is expected on the issue observed in practice. Th is includes considerations of hard-to-value intangibles; and the ongoing work of distributorship and R&D arrangements, but on Transfer Pricing Documentation is expected to also the appropriateness of intra-group charges for facilitate the value chain analysis required under the mere use of the company name. the lines of the Revised Discussion Draft. Distribution arrangements: Careful consideration is required of the compensation of a related-party Th e Takeaway marketer/distributors for possibly enhancing the value of a trademark, including the review PwC Observations of which party bears the cost of the marketing Th e functional value creation is at the forefront of activities and the substance of the (future) rights the Revised Discussion Draft. Where transfer pric- of the distributor. ing may traditionally have been seen as the mere R&D arrangements: In case of the deployment of grappling of pricing on a transactional basis, it is unique skills or if the contract R&D entity bears undoubtedly clear that a thorough analysis of the risks related to blue sky research, then a cost plus corporate value chain will form the starting point modest mark up will not always correspond to of a transfer pricing exercise. Where the proceed- the value of the service rendered. ings on Article 7 (Permanent Establishment) put Use of company name: In general, no payment forward the notion of "Signifi cant People Func- should be recognised from a transfer pricing tions" it appears as if the term "important people perspective for "simple" recognition group mem- functions" lies at the heart of the Article 9 (arm's bership or the use of group names. However, such length principle) proceedings. A strong emphasis payments may be appropriate if there is a clear is put on a thorough comparability analysis which "fi nancial benefi t" to the group entity. comprises a functional analysis. In the absence of

40 a CUP, it appears as if a rather mechanical appli- is looked at in more depth. Indeed, the expectation cation of one-sided methods, leaving the residual is the Masterfi le to serve to explain the global cor- profi t to the non-tested party, will become un- porate value chain (particularly from a functional der pressure provided the tested party engages in perspective), whereas the local fi les will merely cov- more than mere executing functions. In those cir- er pricing matters on a transactional basis. cumstances the Revised Discussion Draft empa- thizes more with the use of valuation techniques Let's Talk and Profi t Splits. For a deeper discussion of how this issue might affect your business, please contact: Th e discussion related to § 40 of the June 2012 Discussion Draft has provoked changes as crystal- Transfer Pricing lized in the new § 80. An MNE is free to outsource Isabel Verlinden, Brussels +32 2710 4422 functions to its affi liates though if there is no per- [email protected] forming of important functions and controlling Madlen Haupt, Brussels of corresponding risk, fi nancial capacity will not +32 2710 4087 suffi ce to be entitled to a more than risk adjusted [email protected] return on capital. Th is is where the messages con- John Cianfrone, New York +1 646 471 0486 tained in the BEPS Comprehensive Action Plan re- [email protected] leased on July 19, 2013 glimmer through in a most Adam Katz, New York visible way, and could very well converge through +1 646 471 3215 [email protected] proposed changes to the Transfer Pricing Guide- Jonas Van de Gucht, Brussels lines envisaged under the BEPS Action Plan. It is +32 9268 8336 probably also in this context that cases where the [email protected] OECD will support the disregarding (or requalifi - Richard Collier, London cation) will be found. Even though the limitation +44 0 20 7212 3395 [email protected] to "exceptional cases" will stand, there is more pres- David Ernick, Washington D.C. sure put on the taxpayer to substantiate that the +1 202 414 1491 transaction(s) would also be plausible to indepen- [email protected] dent parties. Finally, although the OECD issued Rita Tavares de Pina, New York +1 646 471 3066 its White Paper on Documentation as a separate [email protected] Report, the two probably come together when the two-tiered approach in the Documentation Report Send Feedback to [email protected]

41 FEATURED ARTICLES ISSUE 40 | AUGUST 15, 2013

Topical News Brieﬁ ng: of which are laudable aims, but they will require The Double-Edged Sword Of other taxes to go up. And this has led the political Park's Tax Policy opposition to accuse the Government of not being by the Global Tax Weekly Editorial Team entirely straight with the electorate about its plans for individual taxation. Governments have a habit of springing surprises on taxpayers in the aftermath of election victories, and Th e amount that South Korea raises through taxing the administration of South Korean President Park personal income is actually very low compared with Guen-hye, who emerged victorious from last De- its OECD counterparts, so it appears that there is cember's elections, looks to have done just that. scope to raise the required revenue without caus- ing too much pain. However, unsurprisingly, Presi- Th e new Government's proposed tax policies can dent Park promised not to raise taxes while on the be split into two halves. On the one hand, there is campaign trail last year, so the proposals to create plenty to cheer the business community, with new a more "equitable" tax system by changing the way tax incentives being lined up to benefi t small busi- deductions are calculated have been seized upon nesses and early stage investors in particular. Th ere by the opposition because they will eff ectively raise is also an emphasis on encouraging more spending taxation for between one-quarter and one-third of on research and development, and an array of tax salaried workers. breaks are proposed for those who invest in and sell small, hi-tech companies, while tax payment sched- Park of course isn't the fi rst politician to break a tax ules will be relaxed for venture or start-up employ- promise, nor will she be the last. However, on a more ees. Th ere are other tax schemes available mainly fundamental level, while there is much to be praised for small business – too many to list in this short in her tax plans, the country's overall tax burden is briefi ng – which shows that the Government is pre- due to creep up as a result of them, along with the size pared to back its plans to encourage innovation- of government. Th is is a familiar pattern for emerg- led growth (a policy Park has dubbed "the Creative ing economies as they transition to "high income" Economy") and maintain South Korea as one of the countries and governments seek to spread the wealth world's largest manufacturers of high-tech goods. around. But, as has been demonstrated so visibly in Europe, the high-tax, big-Government economic On the other hand though, these tax breaks will model hasn't always been the most successful one have to be paid for. Added to that are the Govern- recently. We are not suggesting that it is Park's inten- ment's plans to expand the welfare system and re- tion to create a high-taxing, high-spending Govern- duce taxation for those on the lowest incomes. All ment. But the warning signs are clearly evident!

42 FEATURED ARTICLES ISSUE 40 | AUGUST 15, 2013

Tax News From The Middle East by KPMG Partners In Th e Region

Sri Lanka – Round-Up Of Income And Indirect Tax Reforms Sri Lanka is known for its intricate web of taxes. In the past 3 years, many of these taxes have been subject to changes that aim to attract more foreign investment. Th e Debit Tax Act was repealed and the Debit Tax abolished. Sri Lanka's taxes include both income tax and indirect taxes, such as the Nation Building Tax, 2012 Budget Tax Holidays Economic Service Charge, Ports and Airports De- In 2012, tax concessions were introduced for velopment Levy and Value Added Tax (VAT). Sri companies, depending on whether they qualify as Lanka also levies six diff erent taxes at the point small-, medium- or large-scale enterprises based on of import. Some important changes to these taxes the quantum of investment. Under these conces- are discussed below. sions, companies in the agriculture, tourism, construction and other industries are eligible for tax 2011 Budget Changes holidays of: Simpliﬁ cation Measures up to 4 years for small-scale enterprises; Th e 2011 budget strived to rationalize and sim- up to 6 years for medium-scale enterprises; and plify the tax system. Resident individuals are taxed up to 12 years for large-scale industries. on worldwide income. Resident employees earning remuneration from employment exceeding Customs Duties Simpliﬁ ed LKR600,000 (Sri Lankan rupees) are subject to In 2010, the government took major steps towards income tax. Non-residents are taxed on income de- simplifying and broadening the trade tax structure rived from Sri Lanka only. with eff ect from June 1, 2010. Th e complexity of custom duty structure was simplifi ed with a four- Also in 2011, the maximum corporate tax rate band duty structure of 0 percent, 5 percent, 15 was reduced to 28 percent (from 35 percent). Sev- percent and 30 percent, while the 15 percent im- eral acts were amended to simplify and rationalize port surcharge was eliminated. Various taxes that taxation, including the VAT Act, Excise (Special applied to imports of most essential commodities Provisions) Act, and the Nation Building Tax Act. have been unifi ed under Special Commodity Levy,

43 to make the tax administration more effi cient and Tax Exemptions For Strategic taxation simpler. Development Projects To attract large-scale foreign investment, the 2008 2013 Budget Foreign Exchange Controls Strategic Development Project Act off ers incentives Eased & Other Concessions to projects that are in the national interest, are likely Th e 2013 budget proposals were instrumental in re- to bring economic and social benefi ts to the coun- laxing Sri Lanka's exchange control regulations. Over try, and are likely to change the country's landscape. the next three years, corporate entities are allowed to borrow up to USD10m per annum and licensed To qualify as a Strategic Development Project commercial banks are allowed to borrow up to US- (SDP), you must show that the goods and services D50m without prior permission from the Exchange provided are strategically important in providing Control Department. Previously, foreign currency public benefi ts, attracting foreign investment, gen- borrowings were restricted to specifi ed industries. erating employment, or transforming technology.

Another proposal would permit resident Sri Lank- Upon receiving Cabinet approval, SDPs enjoy full ans and expatriates to transfer their foreign sav- or partial exemptions for up to 25 years from a ings into investments in foreign instruments up to wide range of taxes, including income tax, VAT, USD5m without prior approval. Currently, such Nation Building Tax, Economic Service Charge, investments require special approval from the Ex- and Customs Duty. change Control Department. A recent amendment added the Betting and Gam- Recent tax amendments exempt interest accruing ing to the schedule of taxes covered by the SDP to any person outside Sri Lanka from investing in a Act. As a result, any casino that is determined to security or bond issued by any person in Sri Lanka. be an SDP also may be exempt from the country's Th ese amendments also provide for half-tax holi- Betting and Gaming Levy. day for three years to a new company listed in the Colombo Stock Exchange (CSE), provided 20 per- United Arab Emirates – New Treaties, cent of its shares are publicly listed. New Free Zone & Other Updates Recent tax developments in the United Arab Emir- Any supply of services by a Unit Trust management ates (UAE) of note to foreign investors include company to a Unit Trust is deemed an exempt supply newly signed tax treaties, emerging diffi culties in for VAT purposes. Additionally, the 10 percent con- obtaining tax residence certifi cates, changes in re- cessionary income tax rate available to Unit Trusts has view procedures for banks in Abu Dhabi, and the been extended to Unit Trust Management companies. introduction of a new fi nancial free zone.

44 Five Tax Treaties Signed over whether a UAE resident entity can obtain a TRC Th e UAE has been busy forging economic ties, ne- and whether the UAE resident entity or the counter- gotiating and signing tax treaties with a number of party are entitled to the relevant treaty benefi ts. territories. In the fi rst quarter of 2013, the UAE signed tax treaties with Hungary, Benin, Libya, Mainland entities generally can obtain a TRC from Japan and Serbia, and an air transport agreement the UAE Ministry of Finance (MOF). However, the with Senegal. Th e UAE continued its treaty nego- MOF currently is not issuing TRCs to foreign com- tiations with Peru, Kyrgyzstan and Malawi. panies that invest into other jurisdictions through entities based in UAE free trade zones (FTZ) that UAE-Japan's "Liable To Tax" Criterion are of a pure "holding" or "investment" nature on Unlike other recent UAE treaties, the newly signed the basis they lack substance. UAE-Japan tax treaty takes a diff erent approach to the test of residence. Under article 4(1), the term It is understood that the MOF has signed a Memo- "resident of a contracting state" includes a "liable randum of Understanding with three FTZs – Dubai to tax" criterion for the treaty's application, rath- International Financial Centre (DIFC), Jebel Ali Free er than other criterion (such as "place of eff ective Zone (Jafza) and Fujairah. Th e agreement will re- management" or "incorporation"). Th is "liable to quire entities established in these locations to provide tax" condition could create potential issues for UAE assurance that they are not "paper" companies and mainland companies and companies registered in actually have substance. Th us, to obtain a TRC, FTZ the Free Trade Zones (FTZ), since they arguably entities will need to provide annual audited fi nancial could be considered not to be "liable to tax" due to statements or, for newly set up companies, the half- lack of enforcement of corporate tax decree or the year accounts or an offi ce lease of six months or more. tax holiday/exemption applied in the FTZ. Even though new companies must satisfy these re- Tax Residency Certiﬁ cate – Access To quirements to obtain a TRC, overseas tax authori- Tax Treaty Beneﬁ ts ties could still challenge their tax residency status if Recent experience suggests that it is getting harder to the relevant treaty contains the "liable to tax" crite- access benefi ts under UAE tax treaties, both locally rion for qualifying for treaty benefi ts. and overseas. Increasingly, foreign tax authorities are requiring Tax Residency Certifi cates (TRC) in order Foreign Banks – Tax Inspection And to confi rm the tax residency status of a UAE entity. Assessments In Abu Dhabi Th e MOF has notifi ed branches of foreign banks that Previously, obtaining a TRC was relatively straightfor- it intends to audit their tax aff airs to ensure compli- ward and routine. Now, however, businesses face issues ance with the Abu Dhabi Bank Tax Decree (2007)

45 and Central Bank Regulations. Although this pro- foreign investors with 100 percent ownership – cedure is routine for (foreign) banks in Dubai, the with no requirement for a local sponsor or agent, Ruler's offi ce in Abu Dhabi has implemented the a guaranteed tax holiday/exemption (for 50 years), initiative and sub-contracted the inspection and as- and ease of capital repatriation. Th e ADWFM's li- sessment process to an accounting fi rm. censing categories and permissible operations are expected to have restrictions similar to those of New Abu Dhabi Financial Free Zone – other UAE FTZs. Enhancing FDI Th e UAE Federal Government has announced it Th e ADWFM is scheduled to be open by 2015. will establish a new fi nancial free zone in Al Maryha In the meantime, there is work to be done on the Island – called the Abu Dhabi World Financial Mar- legal and regulatory framework and how it will be ket (ADWFM). Th e aim is to promote Abu Dhabi governed. As the initiative is still in its early devel- as a leading global market, develop the economic opment stages, the relationship between ADWFM environment, attract fi nancial investment and, like and DIFC – and whether they would co-exist or DIFC, contribute to international fi nancial services. compete – is unclear. However, given the importance of developing the capital and fi nancial mar- In a bid to attract FDI into the Emirate and the kets, the ADWFM's establishment is expected to UAE in general, the fi nancial free zone will provide ultimately benefi t the UAE.

46 FEATURED ARTICLES ISSUE 40 | AUGUST 15, 2013

Australian Elections: Assessing The Parties' Tax Plans by Stuart Gray, Senior Editor, Global Tax Weekly

Th e Australian Government entered a so-called "caretaker period" last week, as the country gears up for the September 7 election. However, with the opposition Liberal/National coalition promising to roll back the Government's fl agship tax measures rate would have fallen from 30 to 29 percent for and reduce business taxation, many changes lay in 2013-14, and to 28 percent for 2014-15. However, store for taxpayers in Australia should there be a when unveiling his 2013 Budget last May, the then changing of the guard in Canberra next month – Treasurer Wayne Swan announced that the idea fi scal conditions permitting. had been dropped.

Corporate Tax Th e Organization for Economic Development and On August 7, the Opposition Coalition unveiled Cooperation (OECD) has since warned that the its headline business tax pledge as it sets its eyes on rate remains "too high."1 victory in next month's election. "Lowering the company tax rate is part of our Plan to Liberal leader Tony Abbot has said that he will cut build a strong, prosperous economy with more invest- the company tax rate by 1.5 percent from July 1, ment and more jobs," said Abbott and Shadow Trea- 2015, should the Coalition be successful. Abbot surer Joe Hockey in a joint statement. "Th is is a tax claims that a 28.5 percent rate would "encourage cut that will boost jobs and strengthen the economy." investment in Australian businesses and jobs during a time of economic uncertainty." "Our company tax cut is part of our Real Solutions Plan to create one million new jobs within fi ve years," He also accuses his Labor rivals of breaking prom- they added. "While the Henry Review into Tax noted ises and failing to deliver on company tax reform that a company tax cut 'will not only result in higher after years of discussion. Th e Government had in- growth but is also likely to result in higher wages,' tended to lower the company tax rate as a trade-off Labor broke its promise to cut the company tax rate." for the higher taxation of certain mining companies under the controversial Mineral Resources Rent "For six years [Prime Minister Kevin] Rudd and Tax (MRRT – see below). Under its proposals, the Labor have talked about a company tax cut but

47 have not delivered. Th e Coalition understands the As the Coalition intends to press forward with this clear connection between taxation policy and in- initiative at the earliest opportunity, Abbot has vestment, jobs and increasing wages." requested that "arrangements are put in place to identify drafters who are expert in the legislative Th e cost of Abbot's initiative is put at AUD5bn detail of this package." Drafting would begin im- (USD4.5bn) over the forward estimates period. mediately following the election, and a Coalition cabinet would aim to have the legislation ready Carbon Tax within one month. However, the centerpiece of the Coalition's tax plans is arguably its pledge to rescind the unpopu- Abbot says that if the Coalition is successful, it will lar carbon tax, otherwise known as the carbon pric- introduce this legislation on the fi rst day of the ing mechanism (CPM). Indeed, the opposition has new parliament. said that this will be their fi rst legislative priority. Th e Mineral Resource Rent Tax (MRRT) Just last month, Rudd announced that Australia Th e Coalition has also proposed to scrap the miner- would move away from the pricing mechanism im- al resource rent tax, introduced last year, within its plemented in July, 2012, and employ an emissions fi rst term, although its policy document does not trading system (ETS) from next year. provide details on the potential costs to the Gov- ernment of doing so, or how it intends to off set any Th e CPM requires large carbon emitters to purchase revenue loss. Nevertheless, the Coalition has said a AUD24.15 (USD24.49) permit for each tonne of that the MRRT "discourages investment by impos- pollution they release into the atmosphere. Rudd ing very high eff ective tax rates on risky projects, claims that the switch to an ETS will result in a while collecting little revenue – particularly after drop in the carbon price to around AUD6. Trea- reimbursing States for their mining royalties." sury estimates put the cost at AUD3.8bn over the forward estimates period. Th e MRRT was the Labor Government's main response to the Henry Tax Review, 2 but it has been Opposition leader Tony Abbot has now written to fought by the mining industry ever since it was fi rst the Secretary of the Department of Prime Minister proposed (originally as the resource super profi ts and Cabinet to alert him of the "Coalition's prior- tax, with its replacement, the MRRT, being a wa- ity legislative drafting requirements," should it form tered down version of this tax). a government. Th e Coalition's pledge to scrap the Clean Energy Legislative Package would result in the With perfect timing for the Government, the High repeal not only of the carbon tax, but of the ETS also. Court last week unanimously dismissed proceedings

48 brought by the Fortescue Metals Group against the resources into the future. Th e MRRT is an impor- legailty of the MRRT. Australia's third-largest iron tant long-term reform for securing Australia's fu- ore miner launched its challenge last year, claiming ture. As a profi ts-based tax, it responds to chang- that the MRRT is unconstitutional because only ing industry conditions, automatically collecting State governments are permitted to impose royal- less revenue when profi ts are low and more revenue ties, and that it discriminated between States. Th e when profi ts are high." so-called Melbourne Corporation doctrine was also invoked by Fortescue, on the basis that the federal If the Coalition wins the election however, the government's legislative powers do not authorize MRRT's days might be numbered. legislation that can control or hinder the execution by any State of its governmental functions. Tax Reform Despite the Labor Government having commis- Th e MRRT legislation3 entered into force on July sioned the Henry Tax Review – a comprehen- 1, 2012. Th is 30 percent tax applies on annual sive review of the tax system – during its term profi ts from mining activity of AUD75m or more, in offi ce, a report released last month by PwC once certain deductions for expenditure and allow- concluded that Australia's tax system is "all but ances are taken into account. As the High Court broken," and that a "long-term, sustainable solu- has explained, once MRRT is deemed payable, "it tion" is desperately needed. is calculated so that a reduction in the mining royalty payable to a State government would, all other According to "Protecting Prosperity: Why we things being equal, result in an equivalent increase should talk about tax,"5 any failure to address the in a taxpayer's liability and vice versa." urgency of fundamental tax reform at both federal and state/territory level risks dramatically escalating Th e Court held that "the treatment of State min- the defi cit. By 2039-40, the combined federal and ing royalties by the MRRT Act and the Imposition state/territory defi cit could reach AUD213.5bn Acts did not discriminate between States and that (USD200bn), and would increase still further to the Acts did not give preference to one State over reach AUD583.1bn by 2049-50. Similarly, govern- another." It also rejected the argument that MRRT ment debt, as a proportion of gross domestic prod- legislation contravened the Constitution and uct (GDP), could grow from the current 12.1 per- breached the Melbourne Corporation doctrine.4 cent to 32.9 percent in 2039-40, and could even hit 77.9 percent by 2049-50. Reacting to the judgment, the Government said that the MRRT "ensures Australians will receive Th e report claims that Australia was comparative- a fair return from the nation's iron ore and coal ly fortunate when the global fi nancial crisis hit,

49 because it was "cushioned" by a Budget surplus, reform is ignored, we face a future with reduced negative net debt and record high terms of trade. living standards and poorer community services. However, going forward, Australia is expected to Without expenditure constraint and tax reform any become more vulnerable to economic downturns if surplus will be short lived and we will see defi cits it does not eff ectively tackle tax reform. growing strongly for at least a generation. Another global economic shock could tip us into disaster," PwC CEO Luke Sayers believes that the Govern- Sawyer warned. ment now faces a crucial choice: "It could cut government services radically, it could build tax rev- As the election campaign got into full swing, sev- enues by incremental change, or it could prioritize eral other organizations have chipped in to the tax growth through carefully targeted expenditure cuts reform debate. Th e Center for Independent Studies and tax reform." (CIS) for example has said that future reform of the Australian tax system should aim at restructuring For the Government to it get right, it must achieve and reducing taxes a balance between what activities are taxed and by how much, and how this tax is raised. PwC con- In a new report, "Shrink Taxation by Shrinking tends that a good tax system preserves social equity, Government,"6 the free market public policy re- stimulates economic growth, and sustains strong search institute identifi es 20 measures aimed at government. In turn, it can boost investment, gen- minimizing the economic harm caused by taxa- erate jobs, and provide a fairer return for working tion. With a general election fast approaching, CIS people, while funding the needs of an ageing pop- Senior Fellow and report author Robert Carling ulation and providing the infrastructure necessary stresses that "reducing, reforming and simplifying for a growing economy. taxes should be a high priority for the next federal government post-election." Sayers is keen for a review of all taxes, whether state or federal. Th e Government must not rush to specifi c High on the CIS's wish list is abolition of the MRRT, solutions, and should instead concentrate on gener- a levy Carling says is a "distorting, complex tax that ating a debate "that considers the needs of individu- raises little revenue." On the tax reduction side, the als, community organizations, businesses and gov- CIS calls for the company tax rate to be dropped ernment." Public and political support will be vital, from 30 percent to 25 percent. If accompanied by a as will a willingness to balance competing interests. 15 percent reduction in personal income tax rates, and a merger of the top two rates into a single 35 "If government spending, productivity and work- percent tax, this could result in savings for taxpayers force participation maintain current trends, and tax and businesses of AUD28bn (USD25.1bn) a year.

50 Assessing the options for increased taxation, Car- to the economic and fi scal challenges facing Aus- ling says that it would be "short-sighted to over- tralia, which it believes can be overcome through look the long-term risk" of any substantial hikes higher spending on infrastructure and a structural, in the goods and services tax (GST) rate. Were the business-friendly reform of the tax regime. GST increased, or its base broadened, as a trade-off for the abolition of less effi cient indirect taxes, the In its "Action Plan for Enduring Prosperity,"7 the Treasury could benefi t to the tune of AUD12bn- Council estimates that the Government faces a fi ve AUD20bn annually. percent of gross domestic product budget shortfall by 2050 if preemptive fi scal policy action is not However, Carling is clear that the way to lower the taken. Otherwise, to bridge this gap, the GST rate tax burden is not to hike the GST but to shrink the would need to rise to 25 percent (from 10 percent), relative size of government. He believes that for tax the Council has warned. reductions to give the Australian economy a long- lasting supply side boost, they should be accom- Th erefore, it recommends: "Consideration should plished in a fi scally responsible way by curbing gov- be given to raising the rate of GST as well as broad- ernment spending at the same time. Moreover, he ening its base as a means of providing additional contends, tax reform can be a revenue-neutral exer- revenue to replace revenue forgone from the abo- cise in restructuring the tax system to improve its lition and reduction of other taxes. Th is process economic effi ciency, fairness and administrative ease. should include arrangements to provide appropriate compensation for households." Th e CIS is campaigning for a cut in the size of government to no more than 30 percent of gross domes- Th e Action Plan centers around a switch in the tic product (GDP) within the next ten years. If this focus of the tax system from income to consump- is accomplished, Carling says, taxes could ultimately tion; direct to indirect taxation. Broadening the be slashed by the equivalent of AUD37bn a year. GST base should include bringing essential goods such as food under the GST net, and higher rates For its part, the Business Council of Australia (BCA) of GST should provide for a corporate income tax has called on the Government to undertake a re- rate as low as 25 percent, the Council says. view of the GST system and revise revenue-sharing arrangements between states to benefi t those with Among its other recommendations, the Action stronger economic outputs. Plan backs proposals for a rethink of the 80-year- old system of GST revenue-sharing. Around AUD- Th e Council's 10 year-plan, which also calls for a 50bn of GST revenues is apportioned to Austra- reduction in corporate income tax, aims to respond lian states each year, with extra revenues granted

51 to less developed states to support economic de- Despite its failure to follow through on many of the velopment. Th e Council has recommended that Henry Review's recommendations, the Labor Gov- the Government phase out this approach over ten ernment still sees itself as reformist when it comes to years and instead divide GST revenues on a per tax. Th e latest example of this was demonstrated in capita basis. Th is would primarily benefi t Western June when a new Tax and Transfer Policy Institute Australia (to the tune of AUD3.1bn each year), was set up with the aid of a AUD3m (USD2.78m) as well as Victoria and New South Wales. Th e grant from the Australian federal Government, Northern Territory stands to lose revenues worth with the aim of encouraging a better understand- AUD2.25bn a year under the proposals. ing of the tax and transfer systems.

Government Position Th e Institute's activities will be research driven. It In July, Australia's new Treasurer Mark Chris will work collaboratively and inclusively with oth- Bowen said that there is a case for an ongoing er institutions and think tanks, and it will engage discussion about tax reform. He made the claim with universities and academics across Australia during a television interview, when asked what his and globally. It will also be expected to cooperate stance was on possible changes to the tax system. with policymakers from the federal, state and terri- He explained: "I think there's a case for talking tory governments. to the states about a more effi cient tax system and reducing the number of taxes we have in Austra- Th e Institute will be guided by an Advisory Board, lia which don't raise very much money, that are a which is to provide it with high level strategic ad- compliance burden for businesses and an admin- vice. Th e Board will be made up of leading experts, istrative burden for Government." and be chaired by Dr Ken Henry (he of the Henry Tax Review). Bowen was nevertheless keen to stress that he will not consider hikes to the GST rate, stating According to Assistant Treasurer David Bradbury: that there was no reason for increasing the GST "Th e contributions of the Institute and its research- or broadening its base. Bowen went on to con- ers will be independent, free of political or ideologi- demn what he seems to believe is the illogic of cal infl uence from governments or advocacy groups, the suggestion, arguing that "if you are raising and will be an important touchstone in the public money through the GST to give the states more debate on tax and transfer policy into the future." money to abolish taxes, then you are not giving it back to the people who would be impacted It remains to be seen if anything concrete emerges by the increase in the GST, and its necessarily from this initiative, and, if Labor loses the election, regressive nature."8 whether the Coalition will retain the new institute.

52 Opposition Position Government was forced to cancel its proposed cor- Th e Coalition promises a debate on the future of porate tax cut because of a sharp fall in tax revenue. the Australian tax system and plans to make further tax reform a priority should it win a second con- Th e Government's most recent Economic State- secutive term. ment,10 released on August 5, suggests that who- ever is in power from September will struggle to Its tax policy summary document states that: "If fi nd room to cut taxes. Th is Statement revealed elected, the Coalition will also release the modeling that lower than expected economic growth has had behind the Henry Tax Review to enable an open a "major impact" on tax receipts, and a joint state- discussion about the future of Australia's tax sys- ment issued by Bowen and Finance Minister Penny tem. We would then seek a second-term mandate Wong notes "signifi cant downgrades to tax revenue for a further tax reform agenda by releasing a com- due to lower terms of trade, falling commodity prehensive White Paper on tax reform prior to the prices and other factors." Personal and corporate next general election."9 income taxes, along with the minerals resource rent tax, have all suff ered from weakened outlooks. Conclusion It is clear that if the Coalition wins power next Projected tax receipts have now been revised month, then several major changes to Australian down by AUD7.8bn (USD6.98) in 2013-14, and taxation could take place over the next few years, AUD33.3bn over the period to 2018. and these will aff ect fi rms subject to the MRRT and the carbon pricing mechanism in particular, al- In the medium-term, the Government will aim though most corporations should benefi t from the at "largely absorbing the fall in forecast revenues, proposed corporate tax cut. while charting a course for return to surplus to keep Australia's fi scal position sustainable," according to If the Labor Government retains power, then the Bowen and Wong. Th ey believe that seeking to off - outlook for taxation in Australia is less certain. set the drop in revenue by introducing budget cuts However, it is likely that Labor will continue its re- would risk both jobs and growth, something they cent policy of piecemeal changes to the tax system say the Government is not prepared to do. as budgetary conditions dictate, with perhaps some minor tax relief given to certain taxpayers. Instead, "protecting growth, employment and essential services in the immediate future has meant Indeed, Australia's fi scal situation could dictate the Government has allowed the downwards re- tax policy regardless of who wins the election. visions in expected revenues in the short term to Th is was demonstrated recently when the current fl ow through to the budget balance," they said.

53 Th e Government anticipates that signifi cant sav- the MRRT and the CPM, and jeopardize its chances ings will take eff ect from 2015-16, which will off - of cutting corporate tax, unless it is brave enough set slower growth in tax receipts and result in a to slash spending in order to off set the reduced rev- "modest" defi cit that year, and a "modest" surplus enue. While it might be able to get one or two of of AUD4bn in 2016-17. these election pledges through, perhaps achieving all three in its fi rst term might not be achievable, espe- Policy decisions taken since ex-Treasurer Wayne cially if the budget falls further into the red. Swan's 2013-14 Budget was unveiled earlier this year should boost tax receipts by AUD1.1bn in Either way, the next two to three years looks set to 2013-14, AUD1.8bn in 2015-16, and AUD5.4bn be an interesting time for taxation in Australia. in 2016-17. A series of hikes in tobacco excise rates, announced last week, will help balance the E NDNOTES budget, and the Australian Taxation Offi ce will be 1 http://www.oecd.org/eco/surveys/australia2012.htm given an additional AUD99m over the next four 2 http://taxreview.treasury.gov.au/content/Paper. years to address ongoing problems with tax debt aspx?doc=html/Publications/papers/report/index.htm and unpaid superannuation. 3 http://www.comlaw.gov.au/Details/C2012A00014 4 http://www.hcourt.gov.au/assets/publications/ On the other hand, some recent moves will put judgment-summaries/2013/hca34-2013-08-06.pdf a dampener on receipts. Th ese include an earlier 5 http://www.pwc.com.au/tax/assets/Protecting- than planned switch to an emissions trading sys- prosperity-22Jul13.pdf tem from July 1, 2014, which will have a net cost to 6 http://www.cis.org.au/images/stories/target30/ the budget of around AUD3.8bn over the forward t30.04.pdf estimates, in underlying cash balance terms. 7 http://www.bca.com.au/Content/102223.aspx 8 http://ministers.treasury.gov.au/DisplayDocs. Th e Economic Statement suggests that there will be aspx?doc=transcripts/2013/005.htm&pageID=004 upward pressure on taxation over the next couple &min=cebb&Year=&DocType= of years if Labor wins the election, as it has pledged 9 http://lpaweb-static.s3.amazonaws.com/The%20 to maintain expenditure at near current levels so as Coalitions%20Policy%20to%20Lower%20 not to risk dampening demand in the economy. Company%20Tax.pdf 10 http://ministers.treasury.gov.au/DisplayDocs. By the same token, these unfavorable budgetary con- aspx?doc=pressreleases/2013/016.htm&pageID=0 ditions may scupper the Coalition's plans to repeal 03&min=cebb&Year=&DocType=

54 NEWS ROUND-UP: COUNTRY FOCUS – SOUTH KOREA ISSUE 40 | AUGUST 15, 2013

South Korea To Finalize Property Th e agreement of another exemption has, however, Tax Changes been delayed because it would have caused substantial revenue losses on local government fi nances, as Finance Minister Deputy Prime Minister Hyun the acquisition tax is a major municipal income Oh-Seok hosted the fi rst "Meeting on Reinvigorat- source. Further discussions have been necessary to ing the Economy" on August 7, and confi rmed that make up the revenue losses by the reallocation of the Government is looking at revising South Ko- other taxes or subsidies from central government. rea's property tax code. In addition, Hyun disclosed that there will be an At the meeting, Hyun led discussions on current eco- examination as to how other existing property tax- nomic conditions and key policy initiatives, as, while es, including the Comprehensive Real Estate Hold- the South Korean economy shows signs of recovery ing tax (payable when property held surpasses a cer- with the second quarter growth rate exceeding 1 per- tain value, for example, KRW600m for houses, and cent for the fi rst time in nine quarters, economic un- KRW500m for land) could be revised, in order to certainties persist both at home and abroad. promote an active real estate market in the country.

As part of the Government's eff ort to help the South Korea Introduces 2013 Tax Bill economy expand in the second half of this year, the Government will fi rstly work in close collabora- Th e South Korean Ministry of Strategy and Finance tion with the National Assembly in order to ensure has issued its 2013 Tax Revision Bill, which restruc- that the property market measures that were an- tures tax incentives and widens the country's tax nounced on April 1, 2013, and included an exten- base, while also supporting small and medium-sized sion for 2013 of the capital gains tax exemption enterprises (SMEs) and those on lower incomes. on buyers of homes valued at less than KRW900m (USD804,500), are passed as soon as possible. Firstly, in support of the priority to develop growth engines in the economy and increase SME support, Hyun also confi rmed that plans are to be fi nalized certain service industries, particularly those in the to lower property acquisition taxes as early as pos- science-technology or ICT sectors, will be granted sible. An exemption from property acquisition tax increased research and development (R&D) sup- was granted in April, but only until the end of June port and SME tax incentives. this year, and the Ministry of Land, Infrastructure and Transport has since been campaigning therefore In addition, in other SME-related tax revisions, that it should be, at least, immediately reinstated. investment tax incentives off ered to startup SMEs

55 against their initial investment will be extended time employee as 0.75 of a full time employee, an from fi ve years to seven years; a 50 percent indi- increase from 0.5. To promote SME employment, vidual income or corporate tax reduction will be the government will continue to provide tax deduc- off ered for sales of technology by SMEs; and merg- tions for social security insurance costs, introduce a ers between high tech companies will be exempt tax deduction of KRW1m per part-time employee from gift tax. that has been hired as a full-time employee, and expand the job-sharing tax credit to all SMEs. Tax incentives for angel investments will be expanded. Angel investors will generally be eligible to For individual taxpayers, the Earned Income Tax receive a 50 percent tax deduction for investments Credit (EITC) will be expanded and the Child Tax worth up to KRW50m (USD45,000), and will Credit (CTC) will be adopted in 2015. Single- then be eligible to receive a 30 percent deduction member families will be eligible for the EITC in on any additional investments above that level. addition to families with children, and the number of families receiving the EITC and CTC will be Th ere will be tax credits for the acquisition of SMEs, increased as the income ceiling will also be raised: whose investments in R&D exceed 5 percent of rev- families with 2 children or less and annual income enue and, when company owners sell their shares of KRW25m or less will be eligible for the EITC, and reinvest in venture companies, sales taxes will and the CTC of KRW500,000 per child will be be suspended until the reinvested stocks are sold. given to families earning KRW40m or less per year. Venture or startup company employees will be allowed to pay taxes in three year installments on Income tax deductions will be applied to taxes owed their stock option transactions. instead of income, which should increase the tax burden on high income earners, although the cur- Th e same tax rules as in the main KOSDAQ stock rent income tax deduction method will be main- exchange will be applied to the KONEX, a new tained for the basic income tax threshold, the public stock market for startup businesses. Startup invest- pension and national health care insurance deduc- ment funds will receive tax credits when they in- tion, and the earned income tax deduction. Th e lat- vest in KONEX listed companies, and there will ter will also be adjusted to minimize tax exemptions. be no capital gains taxes on dividends and stock transaction taxes. In order to broaden the tax base, value added tax will now be applied to cosmetic surgery, and the in- To help achieve its employment targets, the Gov- come of religious leaders, like monks and priests, will ernment will increase tax deductions for job-cre- be taxed as gifts from 2015, with religious groups ating investments by counting one regular part being subject to withholding taxes. High-income

56 farming will be taxed when its earnings exceed a percent of gross domestic product (GDP) in 2012 certain level, although necessity food farming, such to an expected 21 percent in 2017) in order to raise as rice and barley, will continue to be tax-exempt, the funds required for implementing President and government employees will be subject to in- Park's promised increased welfare spending. come tax on their allowances, also from 2015. It is planned that additional revenue will be gener- In order to properly tax overseas income and prop- ated by broadening the tax base, such as through erty, individuals who do not meet the requirement modifying tax exemptions and reductions, and ex- of reporting overseas bank accounts and overseas posing the underground economy, but not through investment will be fi ned. Th e issue of receipts will any increases to tax rates. be required for cash transactions of more than KRW100,000. It has been noted, for example, that South Korean individual income tax revenue was only 3.6 percent Overall, the changes are expected to produce a net of GDP in 2010, ranking 30th out of the 32 OECD increase of almost KRW2.5 trillion in tax revenues, countries, and only about 37 percent of earned in- with gross revenues increasing by KRW4.5 trillion come is taxed due to various tax exemptions and and being off set by KRW2 trillion in reductions. deductions. Th erefore, to impose the optimal tax Th e tax revision bill will be submitted to the Na- burden according to a taxpayer's income, and to tional Assembly at the end of September. expand the tax base, income tax will be reformed by modifying tax deductions and taxing income that South Korea Government's Tax has been tax-exempt. Policies Under Fire Similarly, while South Korea's overall consumption Th e Park Geun-hye Government has issued its tax revenues were around average, its value add- framework for South Korea's middle to long-term ed tax rate (VAT), at 10 percent, was lower than tax policies, through which it hopes to "normal- the OECD average of 18.7 percent. Nevertheless, ize" the country's tax system, but has already be- rather than increasing tax rates, the consumption come embroiled in criticism over its individual tax base will be expanded by modifying tax exemp- income tax measures in the recently-issued 2013 tions, reductions and deductions within both VAT Tax Revision Bill. and individual consumption tax.

Over the next fi ve years, the Government will look South Korea's corporate tax revenue was 3.5 percent to make tax burdens "more equitable," while also of GDP in 2010, the 5th highest in the OECD. raising the total burden marginally (from 20.2 In the future, it is intended to construct a more

57 growth-friendly tax system to boost corporate com- from salaried workers, said to be an easy target petitiveness and to tailor it according to corporate size with ascertainable taxable earnings. It is calculated and stage of development, by adjusting non-taxable that around 4.34m people, 28 percent of workers, items, tax exemptions, reductions and deductions. will see their tax burden increase next year under the proposals. Finally, South Korea's property tax revenue was 2.9 percent of GDP as of 2010, the 7th highest in the For example, those individual taxpayers with an- OECD, and the gift and inheritance tax's high- nual earnings from KRW40m (USD36,000) to est bracket, at 50 percent, tied with Japan for the KRW70m will have to pay an average KRW160,000 highest rate in the OECD. Th e Government will more in taxes, and the fi gure will rise to KRW330,000 promote the lowering of taxes on property transac- and KRW980,000 for the income brackets of tions, together with the optimization of taxes on KRW70m-KRW80m and KRW80m-KRW90m, the real estate holdings, and will improve the gift respectively. Th e highest annual incomes, above and inheritance tax, in order to rectify imbalances KRW300m, will pay some KRW8.5m more. and boost economic effi ciency. Th e Government has stressed that the measures are However, the Government's initial changes to in- structured to reinforce tax revenues while promot- dividual income tax in the 2013 Tax Revision Bill, ing equality in taxation and enhancing income re- whereby it is proposing to apply tax deductions to distribution, as low income families with earnings taxes owed instead of income, and to restructure below KRW40m will pay less tax. However, with tax thresholds, have come in for some criticism. the Bill requiring parliamentary approval, opposition parties are looking to attack it on the grounds Th e Government has been accused of designing that it breaks Park Geun-hye's promise not to raise the changes so as to extract additional revenue taxes made during her presidential campaign.

58 NEWS ROUND-UP: OFFSHORE ISSUE 40 | AUGUST 15, 2013

Offshore Company Formations Taking the entire year into account, the overall Have Slowed number of new company incorporations for the majority of jurisdictions stayed fl at in 2012, which Th e majority of off shore jurisdictions experienced proved to be a year of consolidation following large a decline in company incorporation activity in the increases in annual new incorporations between second half of 2012 compared with the fi rst half, 2009 and 2011. according to legal services consultancy the Appleby Group. However, company registrations in certain "Continued uncertainty in some markets and the jurisdictions off ered signs of optimism. shift in focus from China/Asia to Africa for jurisdictions such as Mauritius and the Seychelles are Despite tough economic conditions, levels of new preventing a speedy return to the numbers of com- company registration activity in one major off shore pany formations recorded prior to the global eco- jurisdiction continued to increase, according to Ap- nomic crisis," Ms. Ballands said. "Add to this sever- pleby's latest "On the Register" report, which pro- al major international events during the second half vides insight and data on company incorporations of 2012 including the US Presidential Elections, in off shore fi nancial centers. Bermuda reported a continued economic uncertainty in the Eurozone 7 percent increase in activity compared to the fi rst and the once-in-a-decade change in leadership in half of the year, according to the report, which looks China, and it's hard to be surprised at the com- primarily at the data for the last six months of 2012. pany registrations barometer struggling to quickly improve," she added, "but we are seeing growth in "Th ere are signs that 2013 will be a watershed year some markets." in terms of seeing a universal return to pre-2009 activity levels across the off shore jurisdictions," said Th e story is similar for the total number of active Farah Ballands, partner and global head of fi duciary companies, with most jurisdictions showing little and administration services at Appleby. movement from the previous year as new company formations cancelled out the numbers leaving the Nonetheless, the on-going weakened economic registries. Hong Kong, as a comparator, saw a 9 conditions continued to impact the overall market percent increase in the total number of active regis- in the second half of 2012. Th ere were 37,881 new tered companies, with the local register there break- off shore company formations in the jurisdictions ing through the one million mark for the fi rst time. covered by the report, a decrease of 3.6 percent Th e Mauritius and Cayman registries are steadily from the second half of 2011, and a deeper decrease returning to their pre-recession peaks, experiencing of 11 percent on the preceding six months in 2012. a 3 percent and 1 percent rise respectively.

59 Among the report's key fi ndings is that in the sec- an investigation into property owned by roughly ond half of 2012: 6,000 Gibraltarians living in Spain. In addition Overall volumes of new off shore companies being Spain could force online gaming companies operat- registered were 11 percent lower in H2 2012 than ing from Gibraltar to use Spanish servers and thus the preceding six months. After a busy fi rst half of the come under Spain's taxation regime. year, jurisdictions including the Isle of Man, Mau- ritius, Cayman and the British Virgin Islands were Despite the growing tension, the UK government approximately 10 percent down in the latter half. has reiterated its commitment to stand "shoulder The jurisdiction that continues to dominate to shoulder" with Gibraltar. off shore new company registration activity by volume is the British Virgin Islands, which has "Th e prime minister has made clear that the UK gov- consistently maintained a six-fold lead ahead of ernment will meet its constitutional commitments its nearest comparator, the Cayman Islands. to the people of Gibraltar and will not compromise Th e UK and Hong Kong, as comparators, con- on sovereignty," a Foreign Offi ce spokesman said. tinue to show signs of recovery. Hong Kong in particular showed signifi cant growth between H1 Gibraltar has long been a source of tension between and H2 2012 with a 7 percent increase in registra- the UK and Spain, but these latest tensions were tions. Both Hong Kong and the UK registrations triggered when the British territory began work on are now well above those recorded in 2009. an artifi cial reef, which Spain alleges is damaging to Spanish fi sherman in the area. Gibraltar Border Tax Row Escalates Hong Kong's Advantages Spain has said that it is considering imposing a Promoted In New Zealand EUR50 (USD66) fee to cross the border into Gi- braltar as its dispute with the United Kingdom over During an offi cial visit to New Zealand, Secretary the British territory escalates. for Commerce and Economic Development Greg- ory So has expounded on Hong Kong's advantages Th e proceeds of the EUR50 tax would be used to in government meetings and in speeches at recep- support Spanish fi sherman who have allegedly suf- tions and seminars. fered damage to fi shing grounds, which they claim has been caused by Gibraltarian authorities. For example, in Auckland, the Hong Kong New Zealand Business Association organized the Con- Spain's foreign minister José Garcia-Margallo nect Hong Kong seminar, in which Hong Kong also said that Spanish authorities could launch Trade Development Council and Invest Hong

60 Kong representatives outlined the city's strengths world's largest wine auction market, and that in attracting investment and developing businesses, "New Zealand vintages are becoming increasingly while So also addressed the opening reception of popular and familiar to people in Mainland China the Hong Kong Festival in Wellington. and across Asia."

"Hong Kong provides the shortest and most reli- Bermuda, US Treasury Complete able route for New Zealand companies to do busi- FATCA Negotiations ness in the Mainland of China. We are also an ef- fective connector to markets across our region," On August 04, 2013 Bermuda's minister of fi - Mr. So told attendees at the business seminar, not- nance, Bob Richards, announced that negotiations ing that Hong Kong is the seventh largest market between Bermuda and the United States Treasury for New Zealand goods exports, and, in the past over the US FATCA Intergovernmental Agreement decade, those exports had increased by 40 percent, (IGA) Model 2 have been completed. to about HKD5.25bn (USD677m) in 2012. US Treasury offi cial Robert Stack said in a statement: He pointed out that Hong Kong's unique advan- "We welcome the conclusion of negotiations with tages: "a comprehensive network of professional Bermuda on a Model 2 Intergovernmental Agree- services, unparalleled access to the Mainland mar- ment to implement FATCA and join our eff orts to ket, bilateral trade agreements with trading part- curtail tax evasion. We are particularly pleased to ners as an individual member of the World Trade build upon our decades-old Tax Information Ex- Organization, and the position as the world's freest change Agreement relationship with Bermuda and economy" made Hong Kong a showcase for New the recent Mutual Legal Assistance Treaty. Zealand brands of goods and services. "We appreciate Bermuda's role as a leader in global In Wellington, So highlighted Hong Kong's ap- tax transparency as well as their role serving along- peal "as a free, open and low-tax platform for busi- side the US on the Steering Group of the OECD ness." For his hosts, he emphasized that Hong Global Forum on Transparency and Exchange of In- Kong became the fi rst free wine port among major formation for Tax Purposes. Th e text of the initialed economies by eliminating tariff s on wine in 2008, agreement will be made public after it is signed." helping to promote the city as a wine trading and distribution center. Th e agreement still needs to be endorsed by the United Kingdom's Foreign and Commonwealth He confi rmed that Hong Kong has, in fact, now Offi ce in accordance with the July 15, 2010 UK Let- overtaken New York and London to become the ter of Entrustment to Bermuda for tax information

61 related matters. Bob Richards said that he is confi - Jersey's chief minister, Senator Ian Gorst, said "We dent the FCO will move quickly so that Bermuda's have been waiting for the position of the Euro- fi nancial institutions are not disadvantaged during pean Union to be clarifi ed. Having regard for the the US FATCA registration process. outcome of the European Union Council meeting in June this year, and the call of the G20 Finance Jersey To Submit To New Ministers at their meeting in July on all jurisdic- Regulations On EU Savings Tax tions to commit to automatic exchange of information, we consider this is now the right time to Th e Council of the European Union is to ask the States announce the proposed change from the retention of Jersey to introduce regulations that will make it tax. Also of relevance is that, with the increase in mandatory, from January 01, 2015, for Jersey to au- the retention tax rate to 35 percent in July 2012, a tomatically exchange tax information for European signifi cant majority of those subject to the tax have Union Savings Tax Agreements. Th e regulations will already taken advantage of the voluntary disclosure repeal the present retention tax provisions for the Sav- option in the agreements." ings Tax Agreements that were entered into in 2005 with the Member States of the European Union. EU Tax Commissioner Semeta said "Automatic exchange of information has long been a cornerstone Th e regulations will also enable those who wish to in the EU's fi ght against tax evasion and is now set do so to change over to the automatic exchange of to become the international standard. It is the best information in advance of it becoming mandatory. way of ensuring that every country can collect the Th is option has been included in response to the revenues it is rightfully due. I welcome Jersey's de- wishes of those fi nancial institutions in Jersey that cision to join the global move towards more open- have offi ces in Guernsey and the Isle of Man and ness and greater information exchange. Th is will who wish to harmonize their systems at the earliest help facilitate fairer and more eff ective taxation, in possible date. Europe and globally."

62 NEWS ROUND-UP: COUNTRY FOCUS – UNITED STATES ISSUE 40 | AUGUST 15, 2013

House Passes Anti-US Carbon Th e House Ways and Means Chairman Dave Camp Tax Amendment (R – Michigan) was also a strong supporter of the Scalise amendment, noting that the amendment On August 2, the United States House of Repre- prevents the President from bypassing Congress sentatives passed the Regulations From the Execu- and imposing a national energy tax that would af- tive in Need of Scrutiny (REINS) Act, to which fect every American. He added that "it would also was added an amendment so that any government be another tax on manufacturers and another in- rule that provides for the imposition or collection creased cost of doing business imposed on middle- of a tax on carbon emissions would require con- class families by the Obama administration." gressional approval. Th e American Energy Alliance wrote in support of Both the REINS Act, which would require House the amendment, pointing out that "the last thing and Senate votes to approve proposed major regu- the American people need is a new tax, especially lations, and the anti-carbon tax amendment were a carbon tax. A carbon tax would hurt American passed by the Republican-led House; the latter families by driving up the cost of energy as well as with a vote of 237 to 176, in which all Republican reducing economic growth." Representatives voted for the amendment, and all the votes against it were Democrat. "According to a study of one popular carbon tax proposal," it added, "a carbon tax would reduce the Th e amendment was off ered by Republican Study income of a family of four by USD1,000 a year, Committee Chairman Steve Scalise (R – Louisiana) cost the economy over 400,000 jobs by 2016, and to stop the Administration from using any author- increase the price of gasoline by 30 cents a gallon ity it might have to implement a carbon tax under by 2030." the regulatory authority of the Clean Air Act or any other statute. "Given repeated declarations from the President that he intends to move forward with his global warming "Th e House sent a strong message to President Barack agenda unilaterally in the absence of Congressional Obama that a tax on carbon would devastate our action," it concluded that the "amendment explicit- economy and he needs to drop any idea of impos- ly requiring any tax or fee on carbon to be approved ing this kind of radical regulation," Scalise said. "Th is by Congress is a crucial safeguard for taxpayers." amendment is necessary to prohibit a carbon tax from being imposed by unelected bureaucrats on behalf of However, although the Democrat vote against the the President without legislative action and oversight." amendment could be construed as signifying their

63 approval of a carbon tax, and could obviously be tax rates as tax expenditures, which could therefore used as such by Republicans at a later date, there be part of a reform package broadening the coun- appears to be little current movement towards the try's tax base, while also admitting the purpose of tax in the Administration. For example, while the the preferential rates is to off set some of the double International Monetary Fund in its recent Article taxation of corporate income and the income tax IV Consultation with the US recommended the bias against other forms of saving. introduction of a carbon tax to raise additional def- icit-reducing revenue, it noted that the Administra- "A conventional static revenue estimate, which as- tion had stated that there were no plans for propos- sumes away tax-induced growth changes, might ing the tax at present. suggest the federal government would collect more revenue by taxing capital gains and dividends as or- US Study Criticizes Increased dinary income," it points out. "When growth ef- CGT Rates fects are added to the analysis, however, the higher revenue disappears. Ending the individual income In one of its case studies on possible tax reform tax's rate cap on long-term capital gains and quali- measures, the Tax Foundation (TF) has found that fi ed dividends would reduce capital formation, pro- eliminating the reduced tax rates on capital gains ductivity, and wages to such an extent that it would and qualifi ed dividends would actually result in a be a major revenue loser for the federal budget." fall in revenue, a lower United States gross domestic product (GDP) and a cut in jobs. Th e TF confi rms that "few tax increases would actually cost revenue, but the capital gains (and divi- Long-term capital gains and qualifi ed dividends dend) tax is one of them." (those paid out of after-tax income by corporations subject to the corporate tax rate) received by indi- Under the conventional revenue estimation as- vidual US taxpayers are currently taxed at preferen- sumption that tax changes have no eff ect on mac- tial tax rates: zero for taxpayers whose other income roeconomic aggregates, it was found that treating puts them in the 10 percent and 15 percent tax capital gains and dividends like ordinary income brackets, 15 percent for taxpayers in the next four would generate an additional USD108bn per year. income tax brackets, and, since January this year, after the "fi scal cliff " agreement, up to 20 percent However, because the tax change would "generate for the highest bracket taxpayers. a very large percentage increase in the tax rate on the returns to capital at the margin, and the desired Th e TF notes that both the Treasury and the Joint capital stock is extremely sensitive to its expected Committee on Taxation regard these diff erential after-tax return," the TF model predicts that "after

64 a several year adjustment period, the capital stock Finally, the TF considers that the revenue loss from would be 16.9 percent less than otherwise, work ending the capital gains and dividend relief could be hours would be about 1.25 percent less, and GDP even worse than the numbers shown above, because would be 6.3 percent lower than otherwise." it says, its model does not incorporate "the lock- in eff ect" – people are taxed on capital gains only It is added that, because tax collections depend on when they realize them and, when the tax rate goes the size of the economy, "the anti-growth eff ects up, people sell their capital assets less frequently. would be expected to have a negative feedback on tax collections. When the model takes the smaller Th e model also does not incorporate the fact that economy into account, it estimates that ending the higher tax rates on capital gains and dividends could rate cap on long-term capital gains and qualifi ed be refl ected in reduced asset prices, which would dividends would actually reduce federal revenues mean smaller capital gains and, hence, less capital by USD122bn." gains tax revenue; nor does it refl ect the likely reduction in dividend payments by corporations if Furthermore, if the static additional revenue es- the tax rate reverts to ordinary tax levels. timate was used to fi nance an across-the-board cut in tax statutory rates, the TF fi nds that in- IRS Disputes Tyco Debt dividual income tax rates could be cut 9.2 per- Interest Deductions cent (for example, cutting the current 25 percent to 22.7 percent). However, while the economy Th e United States Internal Revenue Service (IRS) would benefi t from the tax rate reductions, those is looking to disallow USD2.9bn in interest and re- benefi ts would only partially off set the losses lated deductions fi led by Tyco International Ltd in from the higher tax rates on capital gains and its income tax returns from 1997 to 2000, accord- dividends, and federal revenue would still fall by ing to the company's latest fi ling with the Securities USD150bn annually. and Exchange Commission.

Th e TF concludes that, "although the rate cut would Th e IRS has challenged the treatment of the secu- cushion the output plunge and partially pay for it- rity systems fi rm's intercompany debt transactions self, the end result would still be a smaller economy during the period. It has asserted that substantially and less federal revenue. From the perspective of all of that debt should not be treated as debt for US economic growth and federal revenue, it would not federal income tax purposes, and should, instead, be be sensible to trade the rate cap on capital gains and treated as equity. Its audits have therefore found that dividends for lower tax rates. It would be wiser to Tyco and its former US subsidiaries owe additional leave the cap in place." taxes of USD883.3m and penalties of USD154m.

65 Tyco is the world's largest fi re protection and secu- Tyco's fi nancial condition, results of operations rity company with global headquarters in Switzer- and cash fl ows." land and US headquarters in Princeton, New Jersey. It has said that it strongly disagrees with the IRS In particular, it concludes that, "if the IRS is position and has fi led petitions with the US Tax successful in asserting its claim, it would have Court contesting the IRS proposed adjustments. an adverse impact on interest deductions re- Th e company believes that it has meritorious de- lated to the same intercompany debt in sub- fenses for its tax fi lings, in that its intercompany sequent time periods, totaling approximately loans all have debt characteristics, such as fi xed ma- USD6.6bn, which (could) be disallowed by the turities and interest payments. IRS," and might also affect its divestiture last year of ADT and Pentair, and their respective In its SEC fi lings, Tyco states that "the IRS posi- tax sharing agreements. tions with regard to these matters are inconsistent with the applicable tax laws and existing Treasury US Expats Giving Up Passports regulations, and that the previously reported taxes To Avoid Tax Obligations for the years in question are appropriate." Th ere was a sixfold increase in the number of Ameri- Th e company has also pointed out that "the issues can citizens living abroad who gave up their United and proposed adjustments related to such years are States passports in the second quarter of this year, generally subject to the sharing provisions of a tax compared to the same three months in 2012, as the sharing agreement entered in 2007 with Covidien Administration gets more strident in its search for and TE Connectivity (following their spin-off from undeclared foreign assets. the Tyco group), under which Tyco, Covidien and TE Connectivity share 27 percent, 42 percent and American expatriates who renounced their citizen- 31 percent, respectively." ship during the three months to end-June 2013 rose sharply to 1,130, from 679 in the previous No payments with respect to these matters will be quarter and only 189 in the same period last year, required until the dispute is defi nitively resolved, according to fi gures provided by the Internal Rev- which could take several years, and Tyco believes enue Service (IRS) and published recently in the that its income tax reserves and the liabilities in Federal Register. its accounts continue to be appropriate. However, it does add that "the ultimate resolution of these Th eir renunciation came as actions being taken by matters, and the impact of that resolution, are the US Treasury and the IRS to trace American uncertain and could have a material impact on undeclared assets and income held abroad gather

66 pace, particularly as the deadlines within the For- Released on August 9, the 2013-2014 Priority eign Account Tax Compliance Act (FATCA) ap- Guidance Plan contains 324 projects that are pri- proach and the US negotiates more agreements orities for allocation of the offi ces' resources during with foreign jurisdictions. More Americans living the twelve-month period from July 2013 to June abroad are becoming aware of their unwanted US 2014 (the plan year), and has been drawn up in tax reporting obligations. response to suggestions from taxpayers, tax practitioners, and industry groups. FATCA is intended to ensure that the IRS obtains information on accounts held abroad at foreign fi - Th e Plan represents projects it is intended to work nancial institutions (FFIs) by US taxpayers. Fail- on actively during the plan year, but does not place ure by an FFI to disclose information on their US any deadline on their completion. Projects in the clients, including account ownership, balances and new Plan will provide guidance on a variety of is- amounts moving in and out of the accounts, will sues important to individuals and businesses, in- result in a requirement to withhold 30 percent tax cluding international taxation, health care and the on US-source income. implementation of legislative changes.

In addition, individuals are still required to fi le the In fact, the tax issues in the 2013-14 Plan include Report of Foreign Bank and Financial Accounts consolidated group returns, corporations and (FBAR) if they have a fi nancial interest in or sig- shareholders, employee benefi ts (including retire- nature authority over fi nancial accounts, including ment benefi ts, executive compensation and health bank, securities or other types of fi nancial accounts, care) and excise taxes. Following its recent politi- in a foreign country, and if the aggregate value of cal diffi culties concerning its questioning of the the fi nancial accounts exceeds USD10,000 at any eligibility of exempt organizations, guidance is time during the calendar year. also to be formulated regarding "measurement of an organization's primary activity and whether it US Treasury Releases 2013-14 is operated primarily for the promotion of social Tax Guidance Plan welfare, including guidance relating to political campaign intervention." Th e United States Treasury Department and the Internal Revenue Service (IRS) have released the Tax issues are also included on fi nancial institutions 2013-2014 Priority Guidance Plan, which focuses and products, gifts and estates, trusts, insurance their resources on a wide range of guidance items companies and their products, international tax is- that are considered to be the most important to sues, partnerships and S corporations, tax account- taxpayers and tax administration. ing, tax administration and tax exempt bonds.

67 Some projects that were in the 2012-2013 Prior- and the IRS) are provided with the insight and ex- ity Guidance Plan have not been included on the perience of taxpayers and practitioners who must 2013-2014 Plan because they are no longer consid- apply the rules." Th erefore, they invited the public ered priorities for purposes of allocating resources to continue to provide them with their comments during the 2013-2014 plan year. However, it was and suggestions as they write guidance throughout confi rmed that some of those projects may be con- the plan year. sidered for inclusion in a future Plan. In that regard, the Treasury and the IRS also an- Priority Guidance Plans are updated and repub- nounced the release of the fourth quarter update to lished periodically during the plan year to refl ect the 2012-2013 Priority Guidance Plan. Published additional items that have become priorities and late in November 2012, it originally contained guidance that has been published during the plan 317 original projects. Previous quarterly updates year. Th e periodic updates allow fl exibility through- have included 30 additional projects that became out the plan year to consider comments received priorities and/or were projects published after the from taxpayers and tax practitioners relating to ad- initial publication of the 2012-2013 Plan, and the ditional projects, and to respond to developments fi nal quarterly update includes 12 additional proj- arising during the plan year. ects. In addition, the update refl ects three projects closed without publication, and a total of 129 It was emphasized that "the published guidance projects in the 2012-2013 Plan were published by process can be fully successful only if (the Treasury June 30, 2013.

68 NEWS ROUND-UP: SMEs ISSUE 40 | AUGUST 15, 2013

IMF Addresses Japanese the government to address the fi scal problem. Intro- Consumption Tax Dilemma ducing multiple rates should be avoided as it would severely dilute revenue gains, complicate tax admin- Adoption of a ten percent consumption tax rate in istration, and impose a costly administrative burden Japan is inevitable according to statistical analysis on small and medium-sized enterprises (SMEs)." in a new report from the International Monetary Fund, which urges Japanese policymakers to arrive Th e IMF has acknowledged that growth will like- at a decision on when the hikes should be imple- ly moderate to 1.2 percent in 2014, as a result of mented, and consider further rate increases to the the withdrawal of stimulus and the hike to the con- levy beyond 2015. sumption tax, but underscored that this economic outlook is favorable compared to the sustained eco- Th e report underscores that "a credible medium- nomic contraction that would occur under a scenario term fi scal plan should be adopted as quickly as where the nation's debt mountain fails to be tackled possible as fi scal risks have risen further." from 2014. Strong growth, above 3 percent of GDP, would return from 2018 under the Prime Minister's It adds: "Raising the consumption tax rate to 10 Abenomics reform plan, IMF graphs demonstrate. percent, while maintaining a uniform rate by 2015 is an essential fi rst step, but the government also Th e IMF estimates that even with the two subse- needs to formulate a concrete set of growth-friendly quent consumption tax hikes, raising the fi ve per- revenue and expenditure measures for implemen- cent rate to ten percent by October 2015, the na- tation in the medium term to achieve a declining tion's net debt-to-GDP ratio would steadily climb debt-to-Gross Domestic Product (GDP) ratio." to around 210 percent of GDP by 2030.

Th e report points out that while stronger exports led Th e report therefore advocates "gradually increas- to quarterly economic growth of 3.8 percent in Q2, ing the consumption tax to a uniform rate of at private investment was fl at because of uncertainty least 15 percent," adding: "[VAT] is a stable source about future growth and corporate tax policies. of revenue in an aging society, one of the least dis- tortionary taxes, and easy to administer. It would "Raising the consumption tax rate is an essential fi rst also be fairer than other taxes in addressing inequi- step to contain fi scal vulnerabilities," the report con- ties between young and old generations." tinues. "Th e scheduled tax increases in April 2014 and October 2015 should proceed as planned as they Another 5 percent increase in the consumption tax rate are critical to maintaining confi dence in the ability of (worth 2.5 percent of GDP) and expenditure reforms

69 worth 3 percent of GDP could lead to a reduction in diffi culties paying VAT to the Government in cases Japan's net debt-to-GDP ratio to 155 percent in 2016 where they have not received payment from their before declining to 135 percent of GDP by 2030. clients for the supplies of goods and services they have made," Petkova explained. She added that it Japanese authorities, in response, acknowledged would improve small businesses' cash fl ow, and cut the importance of formulating a concrete mid-term tax fraud cases. fi scal plan in the summer including fi scal consolidation measures beyond 2015. Th ey accepted that Th e scheme is to be introduced through amend- it may be necessary to consider a potential further ments to the Value Added Tax Law and to the Rules hike to the consumption tax rate, above ten percent, Implementing the VAT law. Bulgaria's decision but communicated to the IMF that it would be pre- mirrors recent announcements from Portugal and mature to endorse any possible measure at this time. Spain to introduce the cash accounting basis from 2014. Presently 20 European Union member states Bulgaria To Launch Cash off er the option. Accounting Option US Small Businesses Pay Bulgaria's Deputy Minister of Finance, Lyudmila Highest Tax Rates Petkova, has announced that Bulgaria is to introduce a cash accounting scheme for small and me- A new study showing the high eff ective tax rates dium sized businesses from January 1, 2014. imposed on the S corporations and partnerships paying individual income tax in the United States, Th e scheme will benefi t 220,000 VAT-registered when compared to larger corporations under the businesses with an annual turnover of no more than corporate tax code, has been issued by the National EUR500,000 (USD668,750). Federation of Independent Business (NFIB).

Th e initiative allows eligible businesses to account Th e study found that S corporations and partner- for VAT when a consideration is received from re- ships will suff er 31.6 percent and 29.4 percent ef- cipients in respect of taxable supplies, rather than fective tax rates this year, respectively, while C cor- when an invoice is furnished, and also allows these porations paying corporate tax will see an eff ective businesses to claim credit against input tax imme- rate of only 17.8 percent. diately after payment is made to a supplier. Quantria Strategies, LLC, who produced the new "Th e cash accounting scheme for VAT will help study, noted that a previous investigation in 2009 small and medium-sized enterprises having had found that small business sole proprietorships

70 faced the lowest average eff ective tax rate at 13.3 higher eff ective tax rates, the top marginal tax rate percent. Small business partnerships then faced an that applies to individuals and pass-through busi- average eff ective tax rate of 23.6 percent, small businesses is signifi cantly higher (44.7 percent) than ness C corporations faced a 17.5 percent average ef- the top marginal tax rate that applies to C corpora- fective tax rate, and small business S corporations tions (35 percent). faced an average eff ective tax rate of 26.9 percent. "Th e US tax code is unfair and complex," said However, since the release of that study, it was NFIB's President and CEO Dan Danner. "Today's pointed out that two signifi cant tax policy changes study provides valuable data that confi rms small have occurred – the adoption of the Patient Protec- businesses currently pay a higher eff ective tax rate tion and Aff ordable Care Act imposed a new 3.8 than many large corporations. Th is study delivers a percent tax on investment income (including some strong counter argument to President Obama's re- pass-through income) beginning in 2013, while the cent announcement that corporate-only tax reform resolution of the fi scal cliff debate in January this is the best path." year increased the top statutory tax rate that applies to individual and pass-through business income "Over 75 percent of all small businesses in the US from 35 percent to 39.6 percent, and the reinstated are taxed at the individual rate – signifying the need Pease limitation on itemized deductions raised top for comprehensive reform that addresses both indi- marginal tax rates by another 1.3 percent. vidual and corporate taxes," he added. "NFIB will continue to advocate for a level playing fi eld so that Because of these changes, for the fi rst time since small-business owners can create jobs and grow 2002, it was confi rmed that, in addition to their their business."

71 NEWS ROUND-UP: REGIONAL FOCUS – AFRICA ISSUE 40 | AUGUST 15, 2013

South African Business Warns underestimates the rigidity of the labor market Over New Carbon Tax and, by extension, overestimates the ability of businesses to absorb dismissed workers from energy in- In a statement, the South African Chamber of tensive industries. Commerce and Industry (SACCI) has warned the Government that the impact of the proposed car- SACCI stresses that it is supportive of measures to bon tax "will be signifi cant on the South African reduce carbon emissions in principle, so long as economy and may have severe eff ects on interna- those measures remain tax neutral. It said that it tional competitiveness and job creation." will "continue to engage with the National Trea- sury in order to fi nd a policy solution to climate Its CEO, Neren Rau, stated that SACCI "is con- change that will not endanger economic growth cerned with the potential malign economic impact and job creation." of the proposed carbon tax," and that the Chamber had submitted its comments to the National Trea- US Discusses Future African sury on the Government's Carbon Tax Policy Paper, Trade Initiatives which provides a framework discussion on plans to introduce a carbon tax of ZAR120 (USD12.20) United States Trade Representative Michael Fro- per ton of CO2 , increasing at a rate of 10 percent man has discussed the review and renewal of the annually, from 2015 onwards. African Growth and Opportunity Act (AGOA), as well as other new African initiatives, with the Trade SACCI's notes on the Policy Paper point out that Advisory Committee on Africa (TACA). there is very little detail or commitments on revenue recycling options (for example, tax credits for Froman and Assistant US Trade Representative for investment in energy effi cient machinery). Because Africa Florie Liser met with TACA members to dis- the carbon tax will be sizeable and revenue recycling cuss the Administration's trade and broader eco- is still unclear, there remains a deep concern that nomic initiatives in the sub-Saharan African region. the tax will not actually be applied to mitigate its TACA members represent a wide range of business, adverse impact on the country's economic growth. law and development groups.

It claims that there are also serious doubts as to Th e discussion focused on Froman's recent trip to whether the paper accurately refl ects the diverse South Africa and Tanzania, where President Barack and complex economic impact that a carbon tax Obama announced a series of new initiatives in will have on South Africa. It is felt that the Paper the region, including Trade Africa that aims to

72 double-intra regional trade among the members of are said to be some of the elements to be examined the East African Community (EAC) and increase as part of AGOA's review and extension beyond exports to the US by 40 percent. Froman received 2015. As President Obama has already pointed advice from TACA members on these new initia- out, "the vast majority of US trade with Africa is tives and how to best implement and promote them with just three countries – South Africa, Nigeria in Africa and the US. and Angola. We need to broaden that. And one of the best ways to do that is to make sure more Afri- Froman also discussed the process to review AGOA can goods can compete in the global marketplace. ahead of its renewal, which he plans to discuss at And that means more opportunities for small and the upcoming AGOA Forum, to be held on August medium-sized companies, and entrepreneurs, and 12-13 in Addis Ababa, Ethiopia. merchants and farmers, including women."

AGOA has been, to date, the cornerstone of Amer- Amended Customs Bills ica's trade and investment policy with sub-Saharan Submitted To SA Parliament Africa. At its center are substantial trade preferences that, along with its third country-fabric (TCF) pro- Having completed an extensive consultation provision and the US Generalized System of Preferences cess, the South African Revenue Service (SARS) (GSP) tariff treatment, allow almost all goods pro- has submitted to Parliament two bills within the duced in AGOA-eligible countries to enter the US amended customs and excise legislation that will market duty free. AGOA GSP and TCF provisions eventually replace the current Customs and Excise are currently in eff ect until September 30, 2015. Act, 1964.

Th e Ambassador spoke with the committee about It is proposed that the new legislative framework the future of AGOA and how it might be extended would consist of three separate pieces of legislation and improved to continue the opening of Africa's – a Customs Control Act (CCA) that establishes a markets, increase African regional and global trade, modern system of customs control, in accordance and expand and diversify US-Africa two-way trade with current international trends and best practice, and investment. for all goods imported into or exported from South Africa and that prescribes the operational aspects of In 2012, the value of goods imported into the US the system; a Customs Duty Act (CDA) that pro- from sub-Saharan African under AGOA and the re- vides for the imposition, assessment and collection lated GSP program totaled USD34.9bn, more than of customs duties; and an Excise Duty Act (to be four times the amount in 2001. Africa's economic drafted at a later date) that will do the same for rise and engagement with global trading partners excise duties.

73 Th e primary aims of the CCA are to provide sys- inland container terminal the importer will clear tems and procedures for customs control of all the goods for another permissible customs proce- goods and persons entering or leaving South Africa, dure or for home use and pay the duties. and to enable the eff ective collection of tax on such goods imposed in terms of the tax levying Acts. It was pointed out that this does not provide SARS with adequate information as no value is declared While the CDA uses the "platform" of the CCA on the manifest and only a general description of and is structured around the imposition, assess- the goods is provided. To address this defi ciency, ment, and payment and collection of duties, it clearance at the fi rst port of entry envisaged in the is also written to give maximum eff ect to self-as- CCA will require a declaration of the true value sessment. Persons liable for duties are required, of the goods and duties and taxes that are to be as part of the clearance process, to make their paid, so as to facilitate electronic data processing own tariff classifi cation, value determination and that contributes to eff ective risk management and origin determination of the goods, to assess the customs control. amount of any tax applicable to the goods and to pay tax according to their own assessment. However, SARS has stressed that it is still aware of Th e role of customs is focused on verifi cation of the benefi ts of inland terminals and is not averse the self-assessment, rather than on assessing the to the retention and establishment of such termi- amount of tax. nals. Th e issue is only the use of the manifest that does not contain suffi cient information on which While the updated legislation aims at modernizing basis the goods are risk assessed, and the eff ect of customs administration, it also broadens and tight- the change is that goods will still be able to move ens customs authorities' powers of enforcement from port to inland terminal without the payment against traders, particularly with regard to the inci- of duties and taxes. dence of smuggling. In that respect, SARS has reviewed its current policy of allowing goods to move Morocco Conﬁ rms Large Farms on the basis of a manifest to inland terminals. To Lose Tax Exemption

Currently, the Customs and Excise Act, 1964, al- During the speech by King Mohammed VI on lows container operators to move containers in the occasion of the Th rone Day, marking this year bond from a port of entry to an inland container the 14th anniversary of his enthronement, he con- terminal without submitting a customs clearance fi rmed that large-scale farmers would lose their tax declaration. Th e containers are moved on the basis exemptions this year, as part of the ongoing reve- of a manifest. After the arrival of the goods at the nue-raising eff ort in Morocco.

74 He noted that the "Morocco Green Plan" has to benefi t from the tax exemption scheme which, been adopted to modernize the farming sector, for large-scale farmers, will end this year. Medium and particular attention has been devoted to and small-scale farmers will therefore continue to smallholders with a view to improving their liv- benefi t from tax exemption." ing conditions. Th e adoption of an advanced agriculture strategy refl ected his fi rm belief in the However, he gave no indication as to the size of importance of the sector. farms that will be considered as "large-scale." In Morocco, over 85 percent of farms are of less than As part of his "concern for the well-being of (small- 5 hectares, and 70 percent do not reach two hect- holders)," he announced that "they will continue ares in area.

75 TAX TREATY ROUND-UP ISSUE 40 | AUGUST 15, 2013

BRUNEI – AUSTRALIA

Signature Australia and Brunei on August 7, 2013 signed a Tax Information Exchange Agreement.

CYPRUS – PORTUGAL

Into Force

Th e DTA signed between Cyprus and Portugal will enter into force on August 16, 2013. NEW ZEALAND – VIETNAM

INDIA – MOROCCO Signature New Zealand and Vietnam signed a DTA on Signature August 5, 2013. India and Morocco signed a DTA protocol on POLAND – UNITED STATES August 8, 2013.

KYRGYZSTAN – VIETNAM Ratiﬁ ed

Poland completed its domestic ratifi cation proce- Negotiations dures in respect of the DTA signed with the United According to preliminary media reports, Krygyz- States on August 6, 2013. stan and Vietnam launched DTA negotiations on SOUTH AFRICA – VARIOUS July 30, 2013.

LITHUANIA – MOROCCO Forwarded

South Africa's Select Committee on Finance will Forwarded on August 13, 2013, discuss two Protocols to South According to preliminary media reports, the Govern- Africa's DTAs with Botswana and Oman, and a ment of Morocco on August 1, 201, approved a law new DTA signed with Mauritius. that would ratify the DTA signed with Lithuania.

76 SPAIN – ARGENTINA SPAIN – CYPRUS

Ratiﬁ ed Forwarded

Spain has completed its domestic ratifi cation pro- Th e DTA between Cyprus and Spain was forward- cedures in respect of the DTA Protocol signed ed to Spain's parliament on August 2, 2013, after with Argentina on March 11, 2013, via the pub- approval from the Council of Ministers. lication of Notice 192 in the Offi cial Gazette on July 29, 2013.

77 CONFERENCE CALENDAR ISSUE 40 | AUGUST 15, 2013

Chairpersons: Martin Rochwerg (Miller Th omson), A guide to the next few weeks of international tax gab-fests (we're just jealous - stuck in the offi ce). Michael Morgan (Morgan, Chappell Partners)

THE AMERICAS 9/11/2013 – 9/12/2013

http://www.hg.org/legal-events.asp?action= INTERMEDIATE US page&pcomp=9866 INTERNATIONAL TAX UPDATE

Bloomberg BNA 7TH TAXATION OF INBOUND INVESTMENT Venue: Philadelphia – Morgan Lewis, 1701 Market Street, Philadelphia, PA 19103, USA Federated Press

Key speakers: Bart Bassett (Morgan Lewis LLP), Venue: Novotel Toronto Centre Hotel, 45 Th e Es- Kyle Bibb (KBibb LLC), David Bowen (Grant planade, Toronto, Ontario M5E 1W2, Canada Th ornton LLP), Ramon Camacho (McGladrey LLP), Kevin Cunningham (KPMG LLP), among Chairpersons: Paul D Carman (Chapman and Cut- numerous others ler LLP), Eric Xiao (Ernst and Young, Toronto)

8/21/2013 – 8/23/2013 9/17/2013 – 9/18/2013

http://www.bna.com/uploadedFiles/Content/ http://www.federatedpress.com/pdf/HGLegal/ Events_and_Training/Live_Conferences/Tax_ 7TII1309-E.htm and_Accounting/Conferences_-_Seminars/ IntroInter.pdf 11TH TAXATION OF EXECUTIVE COMPENSATION AND RETIREMENT 14TH TAX PLANNING FOR THE WEALTHY FAMILY Federated Press

Federated Press Venue: Novotel Toronto Centre Hotel, 45 Th e Es- planade, Toronto, Ontario M5E 1W2, Canada Venue: Novotel Toronto Centre Hotel, 45 Th e Es- planade, Toronto, Ontario M5E 1W2, Canada

78 Key speakers: Elizabeth Boyd (Partner, Blake, Cas- Gaming Control Board), Bo Bernhard (Executive sels & Graydon LLP), Terra Klinck (Partner, Hicks Director, International Gaming Institute. Univer- Morley Hamilton Stewart Storie LLP) sity of Nevada), among numerous others

9/17/2013 – 9/18/2013 9/19/2013 – 9/20/2013

http://www.federatedpress.com/pdf/HGLegal/ http://www.c5-online.com/2014/582/us-online- TECR1309-E.htm gaming-law-2013

INTERNATIONAL TAX ISSUES 2013 17TH ANNUAL MEXICO UPDATE

Practising Law Institute Bloomberg BNA

Venue: Practising Law Institute, 810 Seventh Av- Venue: San Diego – Manchester Grand Hyatt, One enue, New York, USA Market Place, San Diego, CA 92101, USA

Chair: Lowell D. Yoder (McDermott Will & Em- Key speakers: TBA ery LLP) 9/23/2013 – 9/24/2013 9/18/2013 – 9/18/2013 http://www.bna.com/mexico-sandiego/ http://www.hg.org/legal-events.asp?action= page&pcomp=8060 10TH TAXATION OF FINANCIAL PRODUCTS & DERIVATIVES US ONLINE GAMING LAW 2013 Federated Press C5 Venue: Novotel Toronto Centre Hotel, 45 Th e Es- Venue: Th e Bellagio, 3600 S Las Vegas Blvd, Las planade, Toronto, Ontario M5E 1W2, Canada Vegas, NV 89109, USA Chairpersons: Ryan Morris (Partner, McMillan Key speakers: Lee Amaitis (CEO, Cantor Gaming), LLP), Richard Marcovitz (Partner, PwC) Mark Brnovich (Director, Arizona Department of Gaming), A.G. Burnett (Chairman, Nevada State

79 9/26/2013 – 9/27/2013 Daniel J Scott (Chadbourne & Parke LLP), Jo- seph Field (Withers LLP), among numerous others http://www.federatedpress.com/pdf/HGLegal/ 9/28/2013 – 9/29/2013 TFPD1309-E.htm http://www.step.org/sites/default/files/ LATIN PRIVATE WEALTH STEPWyoming2013.pdf MANAGEMENT SUMMIT INTERNATIONAL TRUSTS & Marcus Evans PRIVATE CLIENT CONFERENCE 2013

Venue: Trump Ocean Club, Calle Punta Colon, Mourant Ozannes Punta Pacifi ca, Panama City 0833-00321, Panama Venue: Ritz-Carlton Grand Cayman, PO Box Key speakers: Charles Ferraz (CIO and Head of 32348, Seven Mile Beach, Grand Cayman, Cay- Wealth Planning, Itaú Private Bank), Maria Elena man Islands Lagomasino (CEO and Founding Partner, WE Family Offi ces), Rene A. Werner (President, Wer- Key speakers: Morven McMillan (Partner, Mou- ner & Associates), among numerous others rant Ozannes), Shan Warnock-Smith QC (Barris- ter, ICT Chambers, Cayman, and 5 Stone Build- 9/26/2013 – 9/27/2013 ings, London), Clare Maurice (Maurice Turnor Gardner), Joshua S. Rubenstein (Managing Part- http://www.me-uk.com/summit/newsletter. ner, Katten Muchin Rosenman LLP, New York), asp?eventid=20093&RecID=6802 among numerous others

2013 INTERNATIONAL 10/4/2013 – 10/4/2013 TRUST CONFERENCE http://www.mourantozannes.com/events- STEP Wyoming seminars/mourant-ozannes-international-trusts- private-client-conference-2013/conference- Venue: Amangani, 1535 North East Butte Road, programme.aspx Jackson, Wyoming 83001, USA

Key speakers: Charles D Fox IV (Lectur- er, University of Virginia School of Law),

80 INTRODUCTION TO VAT WEALTHMATTERS NEW YORK 2013

IBFD WealthMatters

Venue: ACCRA Beach Hotel, Highway 7 Rockley Venue: McGraw-Hill Conference Center, 1221 6th Bb 15139, Christ Church, Barbados Ave, New York, NY 10020-1095, USA

Key speakers: Fabiola Annacondia (Editor, IBFD's Key speakers: TBA International VAT Monitor), Shima Heydari (VAT team, IBFD) 10/24/2013 – 10/24/2013

10/9/2013 – 10/11/2013 http://www.wealthbriefi ng.com/html/event_detail. php?id=55482 http://www.ibfd.org/Courses/Introduction-VAT- including-E-Commerce-Financial-Services-and- US INTERNATIONAL REPORTING Transfer-Pricing AND COMPLIANCE

STEP LATIN AMERICA CONFERENCE BNA Bloomberg

Society of Trust and Estate Practitioners Venue: Sheraton Chicago Hotel and Towers, 301 E. North Water St, Chicago, IL 60611, USA Venue: Radisson Victoria Plaza, Plaza Independen- cia 759, Montevideo 11100, Uruguay Chair: TBA

Key speakers: TBA 11/11/2013 – 11/12/2013

10/10/2013 – 10/11/2013 http://www.bna.com/itrc-chicago/

http://www.steplatamconference.com/

81 ASIA PACIFIC 9/10/2013 – 9/10/2013

INTERNATIONAL TAX ASPECTS OF http://www.wealthbriefi ng.com/html/event_detail. MERGERS, ACQUISITIONS AND php?id=52941 CORPORATE FINANCE

TP MINDS ASIA IBFD IBC Venue: Novotel Singapore Clarke Quay, 177A Riv- er Valley Road, Singapore Venue: Raffl es City Convention Centre, 80 Bras Basah Road, Singapore, 189560 Key speakers: Michael Butler (Finlaysons), Ruxan- dra Vlasceanu (Research Associate, IBFD), Chris Chair: Shanto Ghosh (Asia Pacifi c Transfer Pricing Woo (PwC Singapore) Leader, Deloitte)

8/19/2013 – 8/21/2013 9/25/2013 – 9/26/2013

http://www.ibfd.org/Courses/International-Tax- http://www.iiribcfinance.com/event/IBC-Asia- Aspects-Mergers-Acquisitions-and-Corporate- Pacific-Transfer-Pricing-Conference-TP-Minds/ Finance-0 dates-venue

WEALTHMATTERS SINGAPORE 2013 ENGLISH LAW WEEK MOSCOW

WealthMatters Th e Bar Council

Venue: Raffl es Hotel, 1 Beach Road, Singapore Venue: British Embassy in Moscow, Moscow, Rus- 189673, Singapore sia 121099

Chairpersons: Stephen Harris (Managing director, Key speakers: TBA WealthBriefi ngAsia, ClearView Financial Media), Bruce Weatherill (Chairman, WealthBriefi ngAsia, 11/19/2013 – 11/20/2013 ClearView Financial Media) http://www.barcouncil.org.uk/for-the-bar/ international/events/english-law-week-moscow,- 19-20-november-2013/

82 BEPS: INTEREST DEDUCTION, MIDDLE EAST AND AFRICA CORPORATE GROUPS AND TAX JURISDICTIONS APPLICATION OF TAX TREATIES IBFD IBFD Venue: Grand Hyatt Jakarta, Jalan M H Th amrin, Kav 28-30, Jakarta 10230, Indonesia Venue: Hyatt Regency Johannesburg, 191 Oxford Road, Rosebank, Johannesburg, South Africa 2132 Chair: Sam van der Feltz (CEO IBFD) Key speakers: Jan de Goede (Senior Principal, Tax 11/26/2013 – 11/26/2013 Knowledge Management, IBFD), Kennedy Mun- yandi (IBFD), Carlos Gutiérrez Puente (IBFD) http://www.ibfd.org/IBFD-Tax-Portal/Events/ Interest-Deduction-Corporate-Groups-and-Tax- 9/25/2013 – 9/27/2013 Jurisdictions-Hitchhiker-s-Guide#tab_program http://www.ibfd.org/Courses/Application- CENTRAL AND EASTERN EUROPE Tax-Treaties-0#tab_program

INTERNATIONAL WEALTH WESTERN EUROPE FORUM 2013 ISLE OF MAN SUCCESSION LAW Bosco Conference & RELATED MATTERS

Venue: Swissotel Tallinn, Tornimae Street 3, 10145 STEP Isle of Man Tallinn, Estonia Venue: Th e Claremont Hotel, Loch Promenade, Key speakers: TBA Douglas, Isle of Man

9/9/2013 – 9/10/2013 Key speaker: Paul Kerruish (Kerruish Law & Trust)

http://bosco-conference.com/en/events/ 8/21/2013 – 8/21/2013 upcoming/tallinn-2013 http://www.step.org/cpd-event-isle-man- succession-law-related-matters

83 67TH IFA CONGRESS INTERNATIONAL WEALTH MANAGEMENT RETREAT

IBFD Swiss Finance Institute

Venue: Bella Center, Center Boulevard 5, Copen- Venue: Badrutt's Palace Hotel, Via Serlas 27, St. hagen, Denmark Moritz CH-7500, Switzerland

Chairpersons: Barbara Angus (Ernst and Young), Key speakers: David Leppan (Chairman, Wealth-X, Xavier Oberson (Oberson Avocats), among numer- Singapore), Professor Philippe Bacchetta(University ous others of Lausanne and Swiss Finance Institute), Martin Naville (CEO, Swiss-American Chamber of Com- 8/25/2013 – 8/30/2013 merce, Zurich), Professor Karl Schmedders (Uni- versity of Zurich and Swiss Finance Institute), http://www.ifacopenhagen2013.com/ among numerous others

SWISS TAX MODULES FOR 9/1/2013 – 9/4/2013 STEP PROFESSIONALS http://www.swissfinanceinstitute.ch/iwmr_ STEP Zurich guide_a4_cg.pdf

Venue: Hotel Glaernischhof, Claridenstrasse 30, THE 23RD OXFORD Zurich 8002, Switzerland OFFSHORE SYMPOSIUM

Key speakers: TBA Off shore Investment

8/27/2013 – 8/27/2013 Venue: Jesus College, Oxford University, Turl Street, Oxford OX1 3DW, England http://www.step.org/swiss-tax-modules- step-professionals-zurich Chair: Andrew De La Rosa (ICT Chambers, Cay- man and London)

9/1/2013 – 9/7/2013

http://www.offshoreinvestment.com/pages/ index.asp?title=The_23rd_Oxford_Offshore_ Symposium&catID=10090 84 TRANSFER PRICING AND 9/9/2013 – 9/12/2013 INTANGIBLES

IBFD http://www.ibfd.org/Courses/Corporate-Taxation- Tax-Treaties-and-EU-Aspects#tab_program Venue: IBFD head offi ce, H.J.E. Wenckebachweg 210, 1096 AS Amsterdam, Th e Netherlands COMPLIANCE CONUNDRUMS, COPING WITH HMRC ENQUIRIES Key speakers: Anuschka Bakker (IBFD), Giammar- co Cottani (European Tax College, Leuven), Mon- Mercia Group ica Erasmus-Koen (PwC), Danny Houben (Global Transfer Pricing Manager with Shell International Venue: All Nations Centre, Sachville Avenue, BV), among numerous others Heath, Cardiff CF14 3NY, Wales

9/2/2013 – 9/2/2013 Key speaker: Mark Morton (Head of Tax, Mer- cia Group) http://www.ibfd.org/Courses/Transfer-Pricing- and-Intangibles#tab_program 9/12/2013 – 9/12/2013

CORPORATE TAXATION: http://my.mercia-group.co.uk/Event/EventInfo? TAX TREATIES AND EU ASPECTS EventID=18910

IBFD CORPORATE TAX REFORM

Venue: IBFD head offi ce, HJE Wenckebachweg TolleyConferences 210, 1096 AS Amsterdam, Th e Netherlands Venue: Halsbury House. 35 Chancery Lane, Lon- Key speakers: Bruno da Silva (Loyens & Loeff ), don WC2A 1EL, UK Giuseppe Melis (Professor of Tax Law and of Tax Litigation at the Law Department of the University Key speakers: TBA of Molise), Belema Obuoforibo (Director, IBFD Knowledge Center), among numerous others 9/12/2013 – 9/12/2013

http://www.conferencesandtraining.com/ en/Browse-Events/tax-conferences/Corporate- Tax-Reform/

85 PRACTICAL APPLICATION OF THE ACCOUNTING FOR INCOME TAX STATUTORY RESIDENCE TEST

IBC BNA Bloomberg

Venue: Millennium Gloucester Hotel, 4-18 Har- Venue: London, UK, TBA rington Gardens, Harrington Gardens, London Chair: Jim Hemelt (Adjunct professor, Georgetown Key speakers: Emma Chamberlain (Pump Court University McDonough School of Business) Tax Chambers), Patrick Way (Gray's Inn Tax Cham- bers), Peter Vaines (Squire Sanders), Keith Gordon 9/16/2013 – 9/16/2013 (Atlas Chambers), among numerous others http://www.bna.com/accounting-income- 9/12/2013 – 9/12/2013 tax-e17179869443/

http://www.iiribcfi nance.com/download/send-fi le/ BANK INTERNAL FUNDS iddownload/9871 TRANSFER PRICING

WEALTH MANAGEMENT British Banking Association CONFERENCE Venue: Pinners Hall, 105-108 Old Broad Street, Institute of Chartered Accountants in England and London, EC2N 1EX Wales Chair: Moorad Choudhry (Treasurer, Corporate Venue: Chartered Accountants' Hall, London, Banking Division at Th e Royal Bank of Scotland) EC2R 6EA, UK 9/16/2013 – 9/16/2013 Chair: Justin Urquhart Stewart (Marketing Direc- tor, Seven Investment Management) http://www.bba.org.uk/events-and-training/event/ bank-internal-funds-transfer-pricing-ftp 9/13/2013 – 9/13/2013

http://www.icaew.com/en/events/2013/september/ rlonconf130913-wealthmgmt-conference

86 EU FINANCIAL TRANSACTIONS TAX PRIVATE CLIENT TAX: CHANNEL ISLANDS

Infoline TolleyConference

Venue: Central London, UK, TBA Venue: St Helier, Jersey, TBA

Key speakers: Daniel Rusbridge (Policy Advi- Key speakers: Dr Raymond Ashton (Partner, Ash- sor, Financial Services, HM Treasury), Liza Taylor ton Barnes Tee), Simon Airey (Partner, DLA Pip- (Head of Product & Operational Tax, Fidelity In- er), Andy Sharp (Director, Specialist Taxation Ser- ternational), Richard Middleton (Managing Direc- vices), Adrian Shipwrigh (Consultant, Mlaw), Tim tor, Association for Financial Markets in Europe), George (Partner, Withers LLP), Giles Clarke (Au- among numerous others thor, Off shore Tax Planning), John Barnett (Part- ner, Burges Salmon), Michael Sherry (Barrister, 9/17/2013 – 9/17/2013 Temple Tax Chambers)

http://www.infoline.org.uk/event/financial- 9/17/2013 – 9/17/2013 transaction-tax-conference http://www.conferencesandtraining.com/en/ MARKET FORCES: TAX NEUTRALITY, Browse-Events/tax-conferences/Private-Client- TRADE AND TREATIES Tax-Planning-Channel-Islands-Sep-13/

CISX CANTON OF SCHWYZ CONFERENCE 2013 Venue: Mansion House, 37A Walbrook, Th e City, London EC4N 8BS, UK IBC

Chair: Tamara Menteshvili (Chief Executive, CISX) Venue: Pfaffi kon SZ, Freienbach, Switzerland TBA

9/17/2013 – 9/17/2013 Chair: Kurt Zibung (Chairman of the Department for Economic Aff airs) http://www.jerseyfinance.je/events/cisx- international-business-summit 9/18/2013 – 9/18/2013

http://www.iiribcfinance.com/event/Finance- Valley-Lake-Zurich-Pfaeffi kon-SZ-Conference

87 TAX PLANNING FOR LAND TAX PAYROLL MANAGERS REVIEW

IBC TolleyConferences

Venue: Central London, UK, TBA Venue: London, UK, TBA

Key speakers: Patrick Soares (Barrister, Gray's Inn Chair: Mike Evans (Employment Taxes Consul- Tax Chambers), Michael Flesch QC (Barrister, tant, MY Consultancy) Gray's Inn Tax Chambers), Sean Randall (Partner, Deloitte), among numerous others 9/19/2013 – 9/19/2013

9/19/2013 – 9/19/2013 http://www.conferencesandtraining.com/en/ Browse-Events/Payroll/Payroll-Managers-Review/? http://www.iiribcfinance.com/event/UK- displayControl=overview Land-Tax-Conferece PRIVATE WEALTH LEADERS ASIA THE CHANGING FACE OF CROSS BORDER INSOLVENCY AND IBC RESTRUCTURING Venue: London, UK, TBA Mourant Ozannes Key speakers: Brita Pfi ster (Director, Rothschild); Venue: Bishopsgate Institute, 230 Bishopsgate, David Carbon (Managing Director, Economic and London EC2M 4QH, UK Currency Research, DBS); Gurbachan Singh (Se- nior Partner, Khattarwong); Richard Jerram (Chief Co-chairs: Michael Crystal QC (South Square), Economist, Bank of Singapore) Robert Shepherd (Senior Partner, Mourant Ozannes) 9/24/2013 – 9/24/2013

9/19/2013 – 9/19/2013 http://www.iiribcfinance.com/event/Wealth- Forum-Asia-Event http://www.mourantozannes.com/events- seminars/other-events/the-changing-face-of-cross- border-insolvency-and-restructuring.aspx

88 TAX PLANNING FOR STEP ANNUAL TAX NON-DOMICILIARIES AND CONFERENCE 2013 EMERGING MARKETS Society of Trust and Estate Practitioners TolleyConferences Venue: Hilton Manchester Deansgate, 303 Deans- Venue: London, UK, TBA gate, Manchester M3 4LQ, UK

Key speakers: TBA Key speakers: John Barnett (Partner, Burges Salm- on LLP), Emma Chamberlain (Pump Court Tax 9/24/2013 – 9/25/2013 Chambers), Michael Sherry (Head of Chambers at Temple Tax), among numerous others http://www.conferencesandtraining.com/en/ Browse-Events/tax-conferences/Tax-Planning- 9/26/2013 – 9/26/2013 For-Non-Domiciliaries/ http://www.step.org/autumn-tax-series PRIVATE EQUITY TAX PRACTICES 2013 STEP SWISS EUROPEAN ANNUAL CONFERENCE 2013 IBC Society of Trust and Estate Practitioners Venue: Th e Hatton, 51-53 Hatton Garden, Lon- don EC1N 8HN Venue: Crown Plaza Zurich Hotel, 420 Badener- strasse, Zurich 8040, Switzerland Key speakers: Mark Baldwin (Partner, MacFar- lanes), Kathleen Russ (Partner, Travers Smith), Paul Key speakers: John Dunne (Grant Th ornton), Dr Clark (Senior Manager, Investment Management, Simone Nadelhofer (Counsel, LALIVE), Eason PwC), Stephen Pevsner (Partner, SJ Berwin), Gem- Rajah (Ten Old Square), among numerous others ma Harris (Partner, Deloitte), among others 10/2/2013 – 10/2/2013 9/26/2013 – 9/26/2013 http://www.step.org/zurich2013 http://www.iiribcfinance.com/event/Private- Equity-Tax-Practices-Conference

89 FEDERATION OF EUROPEAN INTERNATIONAL TRUSTS AND ACCOUNTANTS TAX DAY 2013 PRIVATE CLIENT FORUM, ISLE OF MAN IBFD IBC Venue: Royal Museum of Art and History, Jubel- park, 10 Parc du Cinquantenaire, B-1000 Brussels, Venue: Mount Murray Hotel & Country Club, Belgium Ballacutchel Road, Santon IM4 2HT, Isle of Man

Key speakers: TBA Key speakers: Christopher McCall QC (Barris- ter, Maitland Chambers), Tom Maher (Director, 10/2/2013 – 10/2/2013 Dougherty Quinn), Christopher Tidmarsh QC (Barrister, 5 Stone Buildings) Nick Jacob (Partner, http://www.ibfd.org/IBFD-Tax-Portal/Events/ Lawrence Graham), Elspeth Talbot-Rice QC (Bar- FEE-Federation-European-Accountants-Tax- rister, XXIV Old Buildings), Lesley Lintott (Part- Day-2013 ner, Penningtons), John Machell QC (Barrister, Serle Court), among numerous others WEALTHMATTERS LONDON OCTOBER 2013 10/8/2013 – 10/8/2013

WealthMatters http://www.iiribcfi nance.com/event/International- Trusts-and-Private-Client-Forum-Isle-of-Man Venue: America Square Conference Centre, 1 America Square, 17 Crosswall, London EC3N OVERSEAS ESTATES 2LB, UK Society of Trust and Estate Practitioners Key speakers: TBA Venue: Brown Shipley, 3 Hardman Street, Man- 10/2/2013 – 10/2/2013 chester, M3 3HF, UK

http://www1.wealthbriefi ng.com/brochure/WM- Key speakers: TBA LondonBrochure2Oct13.pdf 10/8/2013 – 10/8/2013

http://www.step.org/overseas-estates

90 CITIZENSHIP BY INVESTMENT RECENT CASE LAW ON TAX AND INTERNATIONAL TREATIES RESIDENCE SUMMIT IBFD IBC Venue: IBFD head offi ce, H.J.E. Wenckebachweg Venue: Jumeirah Carlton Tower Hotel, On Cado- 210, 1096 AS Amsterdam, Th e Netherlands gan Place, London SW1X 9PY, UK Key speakers: Jan de Goede (Senior Principal, Tax Chair: Micha-Rose Emmett (Managing Director, Knowledge Management, IBFD), Bart Kosters CS Global Partners) (Senior Principal Research Associate, IBFD), Shee Boon Law (Manager, Tax Research Services, IBFD), 10/8/2013 – 10/9/2013 Tigran Mkrtchyan (Ernst and Young, Amsterdam), among others http://www.iiribcfi nance.com/download/send-fi le/ iddownload/10310 10/9/2013 – 10/11/2013

IFRS 4 PHASE II FOR INSURERS http://www.ibfd.org/Courses/Recent-Case- Law-Tax-Treaties Deloitte SHOREX WEALTH MANAGEMENT Venue: Central London, UK, TBA FORUM LONDON

Chair: Hitesh Patel (Finance Director & Chief In- Shorex vestment Offi cer, Lucida) Venue: Th e Westbury Hotel, Bond Street, Mayfair, 10/8/2013 – 10/9/2013 London W1S 2YF, UK

http://www.infoline.org.uk/download/send-file/ Key speakers: Bryon Lake (Head of EMEA ETF, iddownload/10353 Invesco PowerShares), Carmen González-Calata- yud (Director, Senior Passive Equity Product Spe- cialist, HSBC), Alain Vandenborre (Founder & Ex- ecutive Chairman, Singapore Diamond Exchange), James Bernard (Director of Business Development, Dubai Multi Commodities Centre), Anthony John (CEO, Th e ECU Group plc)

91 10/10/2013 – 10/10/2013 10/15/2013 – 10/15/2013

http://www.shorexlondon.com/ http://www.infoline.org.uk/download/send-file/ iddownload/10294 EUROPEAN VALUE ADDED TAX – SELECTED ISSUES GLOBAL TAX POLICY CONFERENCE

IBFD Th e Harvard Kennedy School and the Irish Tax Institute Venue: IBFD head offi ce, H.J.E. Wenckebachweg 210, 1096 AS Amsterdam, Th e Netherlands Venue: Dublin Castle, Dame Street, Dublin 2

Key speakers: Walter van der Corput (Editor, Key speakers: Michael Noonan (Irish Minister for IBFD's International VAT Monitor), Peter Hughes Finance), Pascal Saint-Amans (Director, Centre for (Chartered Accountant), Silvia Kotanidis (Case Tax Policy & Administration, OECD), Micheal Handler, European Commission in the Directorate D'Ascenzo (Former Commissioner for Taxation for General Taxation and Customs Union), Carsten the Australian Tax Offi ce), Carlo Cottarelli (Direc- Zatschler (Court of Justice of the European Union) tor, Fiscal Aff airs Department, International Mon- etary Fund), among numerous others 10/14/2013 – 10/16/2013 10/17/2013 – 10/18/2013 http://www.ibfd.org/Courses/European- Value-Added-Tax-Selected-Issues-0 http://www.ibfd.org/IBFD-Tax-Portal/Events/ Global-Tax-Policy-Conference HEDGE FUND REGULATION AND COMPLIANCE PRINCIPLES OF INTERNATIONAL TAX PLANNING IBC IBFD Venue: Central London, UK, TBA Venue: IBFD head offi ce, HJE Wenckebachweg Key speakers: Phil Bartram (Partner, Travers Smith), 210, 1096 AS Amsterdam, Th e Netherlands William Amos (Financial Conduct Authority), Jon Hanifan (Principle, Hedge Fund Tax, Akin Gump), among numerous others

92 OFFSHORE TAX REGULARIZATION Key speakers: Boyke Baldewsing (Principal Research Associate, IBFD), Piet Boonstra (Van Campen Liem), Ronald van den Brekel (Ernst & Young), Chartered Institute of Taxation Patrick Ellingsworth (IBFD), Paul Halprin (Baker & McKenzie), among numerous others Venue: Th e Chartered Institute of Taxation, 11-19 Artillery Row, 1st Floor, Artillery House, London 10/21/2013 – 10/25/2013 SW1P 1RT, UK

http://www.ibfd.org/Courses/Principles- Chair: John Whiting (Tax Director, Offi ce of Tax International-Tax-Planning Simplifi cation)

TAX PLANNING FOR THE FAMILY 10/31/2013 – 10/31/2013 COMPANY AND BUSINESS https://www.tax.org.uk/members/events/ IBC Offshore+Tax+Regularisation+%28Disclosure+ Facilities+and+Agreements%29+Half-Day+Con Venue: Millennium Hotel London Knightsbridge, ference+2013?NRMODE=Published&NRNO 17 Sloane Street, Knightsbridge, London SW1X DEGUID=%7b89F8E0CB-48F0-452B-B416- 9NU, UK -28638757595B%7d&NRORIGINALURL=%2f members%2fevents%2fOff shore%2bTax%2bReg Key speakers: David Heaton (Partner, Baker Til- ularisation%2b%2528Disclosure%2bFacilities%2 ly), Pete Miller (Author of Taxation of Company band%2bAgreements%2529%2bHalf-Day%2bC Reorganisations), Patrick C Soares (Tax Editor of onference%2b2013&NRCACHEHINT=NoMod the Property Law Bulletin), Clive Weir (Director, ifyLoggedIn&time=635082645413927805 Albert Goodman Pension Consultants), Matthew Woods (Partner, Withers), among numerous others TRANSFER PRICING AND ATTRIBUTION OF PROFITS TO 10/24/2013 – 10/24/2013 PERMANENT ESTABLISHMENTS

http://www.iiribcfi nance.com/download/send-fi le/ IBFD iddownload/10590 Venue: IBFD head offi ce, HJE Wenckebachweg 210, 1096 AS Amsterdam, Th e Netherlands

93 Key speakers: Patrick Ellingsworth (IBFD), Luis CEO, SkyBridge), Cherie Blair (Founder, Cherie Nouel (IBFD), Antonio Russo (Partner, Baker & Blair Foundation), Peter Brock (Head of Family McKenzie) Offi ce Services, Ernst and Young), among numerous others 11/4/2013 – 11/6/2013 11/5/2013 – 11/6/2013 http://www.ibfd.org/Courses/Transfer- Pricing-and-Attribution-Profits-Permanent- http://www.prestelandpartner.com/familyoffice Establishments#tab_program forumzurich.html

TAX PLANNING FOR STEP JERSEY 21ST ANNUAL AMBITIOUS SMES INTERNATIONAL CONFERENCE

TolleyConferences STEP Jersey

Venue: London, UK, TBA Venue: Pomme d'Or Hotel, Liberation Square, St Helier, JE1 3UF, Jersey Chair: Mike Truman (Editor of Taxation magazine) Key speakers: Stephen Arthur (Temple Tax Cham- 11/5/2013 – 11/5/2013 bers), Russell Bussey (IPS Capital), Christopher Butler (Boodle Hatfi eld), Andrew De La Rosa http://www.conferencesandtraining.com/ (ICT Chambers), John Harris (Jersey FSC), Nata- en/Browse-Events/tax-conferences/Tax- sha Hassall (Boodle Hatfi eld), Pamela Pitcher (Pa- Planning-SMEs/ mela Pitcher Consulting), Eason Rajah (Ten Old Square), John Riva (KPMG), Shân Warnock-Smith FAMILY OFFICE FORUM, ZURICH (5 Stone Buildings)

Prestel and Partner 11/8/2013 – 11/8/2013

Venue: Th e Dolder Grand, Kurhausstrasse 65, 8032 http://www.step.org/sites/default/fi les/STEP%20 Zurich, Switzerland Jersey%2021st%20Annual%20International%20 Conference%20programme.pdf Key speakers: Ida Beerhalter (Co-Head, IOME Family Offi ce), Max von Bismarck (Partner and

94 INTERNATIONAL TAX PLANNING 10/12/2013 – 10/12/2013 ASSOCIATION'S FLORENCE MEETING http://www.conferencesandtraining.com/en/ International Tax Planning Association Browse-Events/tax-conferences/Tax-Planning- Residence--Emigration-Nov-13/?display Venue: Th e Westin Excelsior Florence, Piazza Og- Control=overview nissanti 3, 50123 Florence, Italy FUTTER AND PITT: MISTAKES BY Chairman: Milton Grundy (President, Interna- TRUSTEES tional Tax Planning Association) Institute of Law 11/10/2013 – 11/12/2013 Venue: Pomme d'Or Hotel, Liberation Square, St https://www.itpa.org/?page_id=7717 Helier, JE1 3UF, Jersey

TAX PLANNING: RESIDENCE AND Key speakers: Richard Wilson (Barrister), Matthew EMIGRATION Slater (Barrister), Lord Millett (former Lord of Ap- peal in Ordinary), among numerous others TolleyConferences 11/20/2013 – 11/20/2013 Venue: London, UK, TBA http://www.lawinstitute.ac.je/downloads/ Key speakers: Priya Dutta (Gabelle LLP), Chris- Futter%20and%20Pitt%20-%20Mistakes%20 topher Groves (Withers LLP), Phillip DeDearden by%20trustees%20-%20updated.pdf (Chartered Accountant)

95 IN THE COURTS ISSUE 40 | AUGUST 15, 2013

ASIA PACIFIC

India Th e Delhi Income Tax Appellate Tribunal heard the case of a company in India which was charged with reporting to a German company the results of clinical tests being run at a company in Sri Lanka. Th e Indian company applied to the tax authority for permission to not withhold tax on the payments to the Sri Lankan company because it did not have a presence in India, and also because the payments could not be considered royalties under the India-Sri Lanka tax treaty.

Th e assessing offi cer disagreed and ordered the Indian company to withhold 10% of the payments as tax. A listing of key international tax cases in the Th e Commissioner of Taxation agreed with the com- last 30 days pany, after which the offi cer appealed to the Tribunal. that the company was paying for and passing com- Th e offi cer maintained that the payments were con- mercial information from Sri Lanka to the German sideration for "information concerning industrial, company as an ancillary company without the in- commercial or scientifi c experience" under the tax volvement of any technical know-how, and there- treaty and should be subjected to the withholding fore the payments were not royalties but business tax on royalties, despite the lack of a provision for profi ts not subject to withholding tax. 'fees for technical services'. Th e company argued that it performed services for the Sri Lankan com- Th e judgment was delivered on July 26, 2013. pany which meant that the payments were business profi ts which were not taxable in India because of the http://www.itatonline.in:8080/itat/upload/563 lack of a permanent establishment, and that provid- 264923170258495613$5%5E1REFNO3879_ ing the information to the German company was a Kendles_India.pdf general duty which did not fall under the treaty. Income Tax Appellate Tribunal: ITO v. Kendle In- Th e Tribunal accepted the company's argument dia Ltd. (ITA No.3879/Del/2011) and agreed with the Commissioner's ruling, stating

96 WESTERN EUROPE entire VAT amount from the construction costs of a building used for its business and made available Belgium to its employees for private use, but that the com- In these joined cases, the European Court of Justice pany would be liable for VAT on the cost of provid- was asked for a preliminary ruling concerning Bel- ing it for private use as the supply of a service. gian companies which had buildings used for their business activities that were also lived in by man- However, the letting of property as a service is ex- agers and their families without any consideration empt from VAT according to EU law as long as the being paid. principles of letting are fulfi lled, specifi cally the imposition of rent for a fi xed period of time. Th e ECJ Both companies claimed deduction of VAT from concluded that it was for the national court to de- the entire construction costs of the buildings, but cide whether provision of the buildings to the man- the tax authorities refused to allow the deduction of agers for private use constituted letting of property a percentage of VAT equal to the degree each build- based on EU law, such as to allow the deduction ing was being used for residential purposes. Both of VAT from the cost of the letting (which in these companies won in their respective Courts of Ap- cases would be relative to the amount of private use peal on the basis that the buildings were provided of each building), despite the service being consid- to the managers in order for them to carry out the ered a benefi t in kind under national law. business activities of the companies, and therefore the costs related to their private use of the build- Th e judgment was delivered on July 18, 2013. ings were deductible as capital expenditure. Th e tax authority in both cases appealed to the Court of http://curia.europa.eu/juris/document/document. Cessation, which approached the ECJ for an inter- jsf?text=&docid=139764&pageIndex=0&docla pretation of EU law regarding private use of a com- ng=EN&mode=lst&dir=&occ=first&part=1&c pany building for VAT purposes. id=3659182

Th e ECJ was asked whether the EU VAT Direc- European Court of Justice: Medicom v. Belgium tive prevented a company from providing part of and Maison Patrice Alard v. Belgium (C-210/11 and its building to an employee without receiving any C-211/11) form of consideration while expecting to be able to deduct VAT from that building, and whether it was Bulgaria relevant that use of the building was part of the em- Th e European Court of Justice was asked for a pre- ployee's contract or a result of their performance. liminary ruling concerning a Bulgarian company Th e ECJ stated that a company may deduct the which had its staff provided by another company.

97 Th e former company wanted to deduct VAT from European Court of Justice: AES-3C Maritza East 1 the cost of providing transportation, work clothes EOOD v. Bulgaria (C-124/12) and protective gear to the employees but the tax authority refused on the basis that the staff were em- Denmark ployed by the latter company. Appealing against that Th e European Court of Justice was asked for a pre- decision, the former company maintained that it was liminary ruling concerning a company which sold the economic employer of the staff and was legally products in Denmark but did not provide any de- responsible for their health and safety. Th e court ap- livery services. Goods were purchased for both pri- proached the ECJ for an interpretation of EU law. vate and commercial purposes by customers from several Member States; however the company did Th e ECJ stated that there was a suffi cient connec- not require knowledge of their intent or their nation between the employees and the hiring compa- tionality before making the sale, and paid Danish ny so that goods and services supplied to them were VAT and excise duty on all sales of spirits. expenses incurred for the sake of the business, and that not allowing the deduction of VAT would have Th e Swedish Tax Agency decided that the company interfered with "the principle of neutrality of VAT" was required to accept a "simplifi ed accompany- since the company was carrying out an economic ing document" when selling spirits to Swedish cus- activity for which the expenditure was necessary. tomers, but the company complained to a Danish court which approached the ECJ for an interpre- Th e ECJ was also asked to consider the impact of tation of EU law regarding whether the company a national law which expanded the scope of exclu- was required to ascertain whether its goods were sions of the right to deduct VAT after Bulgaria had purchased for private or commercial use and where joined the European Union, but ultimately com- the customer was situated. mented that it was a matter for the national courts to decide. However, the general ruling was that a Th e ECJ revealed that under EU law it is "the person national law that is found to be incompatible with who is responsible for the intra-Community move- the EU VAT Directive must be set aside. ment" who must prepare the document when goods are intended to be consumed in a diff erent Member Th e judgment was delivered on July 18, 2013. State from where the excise duty is paid. It found that due to the nature of the company, it was the customer http://curia.europa.eu/juris/document/document. that was moving the goods between Member States, jsf?text=&docid=139758&pageIndex=0&docla as the company did not deliver its products. Th e ng=EN&mode=lst&dir=&occ=first&part=1&c company was therefore not responsible for checking id=2825762 whether a customer must prepare a document.

98 Th e ECJ also stated that under EU law goods fund were normal VAT-deductible business costs, bought by private individuals were subject to excise or alternatively that the pension fund was exempt duties in the Member State where they were pur- from VAT as an investment fund. Th e tax author- chased, but products "being held for commercial ity's argument was that the company itself was not purposes in another Member State" were liable for the benefi ciary of the services, did not provide con- excise duties in that Member State. Th e conclusion sideration for them and so could not deduct the reached was that the national tax authority had to VAT, and that the pension fund was not exempt consider each case on its own merits with regard to from VAT. Th e court approached the ECJ for an excise duties on products sold for both private and interpretation of EU law. commercial use. Th e ECJ stated that for the deduction of VAT there Th e judgment was delivered on July 18, 2013. must exist a link either between the input and output transactions of a business for which VAT is paid http://curia.europa.eu/juris/document/document. and deducted, or between the costs of the services jsf?text=&docid=139755&pageIndex=0&docla in general and the company's economic activity, ng=EN&mode=lst&dir=&occ=first&part=1&c and that that link depended on the relationship of id=2806412 the expenses with the company, given the indepen- dence of the pension fund. European Court of Justice: Metro Cash and Carry v. Denmark (C-315/12) Firstly, the ECJ reasoned that the company had a legal obligation to provide a pension to its employees, Netherlands and so the costs of the services were a part of its tax- Th e European Court of Justice was asked for a pre- able business activities. Secondly, it argued that not liminary ruling during proceedings concerning a allowing the deduction would disrupt the system of company in the Netherlands which had established VAT deduction with regard to the tax benefi t it pro- a pension fund separate from its business and paid vides, and undermine the neutrality of VAT. Th ird- into it on behalf of its employees. A subsidiary of ly, it stated that the separation of the fund from the the company arranged for administration and man- company should not impact its ability to deduct agement services for the fund, and the company VAT; otherwise its freedom to choose the most ben- deducted the VAT on the cost of those services. efi cial method to fulfi ll its obligation to provide a pension to its employees would be restricted. Th e company was assessed for the amount of VAT which it contested, arguing at the Regional Court Th erefore, the ECJ concluded that under EU of Appeal that the services provided to the pension law a company is permitted to deduct VAT from

99 administration and management services provided http://curia.europa.eu/juris/document/document. to a separate pension fund, as long as "the existence jsf?text=&docid=139742&pageIndex=0&docla of a direct and immediate link" can be established. ng=EN&mode=lst&dir=&occ=first&part=1&c Given this decision, there was no need for the ECJ id=2957873 to consider whether the fund was exempt from VAT as a "special investment fund". European Court of Justice: PPG Holdings BV v. Netherlands (C-26/12) Th e judgment was delivered on July 18, 2013.

100 THE ESTER'S COLUMN ISSUE 40 | AUGUST 15, 2013

Deadline August 15, 2013 for renminbi business; but Hong Kong has easily Competition is the number one operating principle fended them off , with deposits of RMB677bn last between countries as between species, individuals April. Hong Kong settled 85 percent of China's ex- and companies, so Switzerland and Luxembourg are ternal renminbi-denominated trade (worth a total demonstrating their evolutionary fi tness by seizing of RMB1.7 trillion) in 2012. Eat your heart out, leadership of the continental European Renminbi London! As with Luxembourg and Switzerland, market . Of course, the very assets that have allowed but even more so, Hong Kong has built-in advan- them to become two of the most successful "off - tages when it comes to renminbi business, and has shore" jurisdictions are the ones that are making it been fully supported by China (of which it is after easy for them to make the running in renminbis: all a part) in developing it. And it was Hong Kong, low tax rates, fl exible corporate forms, openness to rather than London, that launched a HIBOR fi x- international business fl ows and a high level of fi - ing , just a month ago. Mind you, after the LIBOR nancial expertise. It might have been expected that scandal, it would have been a stretch for London London would emerge as the preeminent European to have had a shot at that. Given China's large and location for renminbi activity, especially given its growing trading involvement with the Middle-East historical links with Hong Kong, but this doesn't and Africa, Dubai, another low-tax location, is the appear to be the case: renminbi deposits in Lon- other place we shouldn't disregard in terms of ren- don in June, 2013 appear to have been largely static minbi usage – volumes are minimal so far, but that at about RMB14bn, compared to Luxembourg's is probably just a temporary situation. Anyway, for RMB40bn and Switzerland's RMB10bn. Trade- now, Hong Kong rules the Yuan, in international related renminbi transactions in London were run- terms at least. ning at RMB20bn annually in mid-2013, however. Luxembourg's success probably owes something to Th e Vodafone aff air drags on. Th e company evi- the fact that the three top Chinese banks have all dently doesn't believe it will get a fair hearing from chosen to locate their European headquarters there. the Indian Government, and who can blame it after India simply changed the rules when Vodafone But these European renminbi volumes are dwarfed had won fair and square in the courts. It's diffi cult into insignifi cance by those in Hong Kong. HSBC's to understand the Government's motivation: the forecast for renminbi-denominated bond issuance in Vodafone case is worth a fair slab of change in itself Hong Kong in 2013 is in the region of RMB280bn (USD2.2bn), but surely the Government isn't be- to RMB360bn. Taiwan and Singapore have both ing driven simply by cupidity? Recent news about launched challenges, with the former boasting de- tax collections seemed to be mildly positive, al- posits of RMN70bn just four months after opening though it won't have much of an impact on the

101 budget defi cit, which is running at about 5 percent products. Excellently, the Chairman of the (Brit- and doesn't seem likely to fall in the near future. ish) company being hurt by the pottery duties said Debt has shot up over recent years – it is not high in that one "can't sit at home being a little European relation to GDP, but the maturity profi le is worry- hiding behind tariff s and duties." Of course that's ing. Anyway, that is beside the point: with elections exactly what the protectionist complainants are do- imminent, the current, ineff ectual government is ing. Th e rules underlying the protective actions that not going to do anything about the country's poor are taken by the Commission are mind-bendingly economic situation. Why then continue to perse- complex. You can prove anything with statistics, cute foreign investors? At least the Government is indeed, and in its rush to appear responsive to the consistent in that sport, as is shown by its long-run- supposed imminent demise of European producers ning dispute with Mauritius over their tax treaty, (a frenzy calculatedly whipped up by the lobbyists although the underlying motive in that case was to who line the rue de la Loi – hah! – in Brussels) the try to stop "round-tripping" by Indian investors. Commission simply reaches for the nearest instru- Th e result, however, is the same as with the Voda- ment to hand. It's the amazingly high level of the fone case (and other foreign investor tax spats) – to protective duties that really gets to me: 36 percent deter foreign investment. Heaven knows there are in the case of the pottery, and up to 60 percent enough barriers – bureaucratic, fi scal and unmen- in the case of the panels. In a modern world, with tionable – to foreign investment already, without out-sourcing available for virtually every step in the adding uncertainty to the mix. Yet the Government manufacturing process, how can it possibly be true persists. Perhaps, in the rarefi ed atmosphere of the that a Chinese producer can sell goods for less than governing circles of the world's largest democracy, half of what it costs a European producer to make foreign investment simply doesn't signify. the self-same objects? Why isn't the European producer using a Chinese supplier, as was the British I suppose that the EU thinks it should be congratu- pottery producer? Nonetheless, in their dream- lated in having escaped from a major trade confron- world in Brussels the bureaucrats shake the statisti- tation with China over its anti-dumping and coun- cal kaleidoscope and come up with nonsense. tervailing measures in the solar panel sector. But this was a disaster of its own making, and the game is not Th e real problem is that the trade protection pro- over yet. Th e mad jumble of EU trade policy is also cess is opaque and totally undemocratic, both in demonstrated this week by the UK pottery aff air, Europe and in the US, where the odious Commerce in which, as with the solar panel dispute, a small Department completely matches the EU Commis- coterie of ineffi cient producers has "captured" the sion in its capacity to be taken in by producer lob- naive arbiters of trade at the Commission and bul- bies. Neither in Europe nor in the USA is there lied them into applying penal duties to competing any mechanism by which democratic oversight

102 is applied to the process. Arguably, the Congress for the pottery debacle. My proposal is that a com- could interfere, but in reality that is unfeasible, and pletely independent auditing body should be set how would it expect to overturn a ruling which has up, staff ed by non-political trade experts recruited been made under the President's administrative from the real world, and that any "anti-dumping" fi at? In Europe the process could be slightly more or "countervailing" ruling should be subject to ap- direct, via the European Parliament, but that body proval by that body. And I would ban those weasel is about as democratic as my little fi nger. If any- words, anyway. thing it's captured just as thoroughly as the Com- mission: it was a British MEP who was responsible Th e Jester

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